There is a bounce in the war trade after the market open. It's a tough one because it's a long weekend and tomorrow's non-farm payrolls report is also a tricky one (though I don't think it matters that much).
The big question is: Will Trump escalate or cut-and-run? For most of this week, the market was pricing in Trump declaring victory and walking away, leaving Europe, Asia and the Gulf states to clean up the Hormuz mess. Yesterday though, he talked about bombing Iran back to the stone age and that certainly sounds like escalation, and certainly not a basis for a ceasefire.
So oil prices shot higher but notably, they've come in a couple bucks in the past hour. Even more notable is the Treasury market, with 2-year yields now flat on the day and down 7 bps from today's peak.
So what's the thinking?
Option 1:
It's recession pricing. Yes, higher oil prices limit Fed rate cuts bu 3.80% for two years is decent yield to ride out whatever is coming. It's a brutally tough market to figure out right now and investors might simply be taking the safe way out even if much of the real gains will be wiped out by inflation.
Option 2:
The market is sensing a TACO. Trump woke up to a huge rally in oil prices today and that's not going to poll well if it continues. Trump's disapproval rating is already bad and a further rise in oil prices and a quagmire going beyond his 4-6 week timeline isn't going to help. France's Macron today said there is no easy way to open Hormuz so the path of least resistance is to simply pack up and leave.
The problem is that Trump is entirely unpredictable. In his tweets all week, he sounded ready to leave but there are marines and paratroopers building up near Iran so we could easily get into an escalation trap and it could all happen before markets reopen on Monday.
