Peace Deal

Peace Deal

As of last night, President Trump has announced to the market that a memorandum of understanding is going to be signed in the very near future between then US and Iran and has stipulated that the war is over. Iran has not denied the news but has mentioned that the final agreement is yet to be finalized and approved.

As of this morning, the market has extended the rally given the recent under performance as more details emerge about the agreement drafted which hopefully will end the Middle East conflict. The draft deal between the two counterparts has 14 provisions, including the reopening of the Strait of Hormuz within 30 days and a release of frozen Iranian assets. There will also be a 60-day period where nuclear issues will be negotiated. Apparently, the deal will be signed around the G7 meeting at the end of this week in Geneva. Obviously, if history has taught us anything so far, this type of news can be very misleading sometimes as the situation is quite fluid. We hope this is the end of the conflict as there are so many more exciting perspectives to focus on which are pro-growth and evolution.

There will be more details arising, most probably during the weekend, despite that, the market has started to price in a more permanent solution with the price of oil trading 5% lower week to date. On the equity side, we have seen a small drawdown which was partly due to the Iran-US stalemate and from selling exposure to gain some firepower to be used in the upcoming IPOs. SpaceX made history with a $75bn billion IPO as it was four times oversubscribed. At the time of writing this, the pre-market is indicating that shares could open with a pop of at least 30% up on their first day of trading. All in all, equity markets are bouncing with European indices outperforming, up 1-2% week on week. Depending on the performance of SpaceX, we think that there is a catch-up trade here as technology companies have experienced a drawback of around 3.5% drawdown on an index basis month to date. Gold traded on a weak tone, down 8% for the month as rate expectations in the US have increased on the upside and by default strengthened the USD.

On the rates side, we had the ECB meeting on Thursday which delivered a 25bs rate hike as expected. Given the hopeful resolution of the conflict and the opening of the Strait of Hormuz, the market has dialed back some of the rate hike expectations on both sides of the pond. In Europe, the market is expecting another 40bps of rate hikes by year end (see table), something which we may not agree, especially if the inflation numbers take a more transitory scope.

Looking ahead…
Next week, we have the first FED meeting where Kevin Warsh is going to preside. The market is going to be very focused on its rhetoric around inflation and how this will evolve in terms of rate hikes. Moreover, we will soon get more information, hopefully with the timing of the pending IPOs by Open AI and Anthropic. In terms of seasonality, we are entering a quieter part of the season, hence we expect liquidity to draw back which will create some more exacerbated moves in both directions.

Written by: Michael Konstantinou, Senior Portfolio Manager