Stock Markets: Can a US-Iran Deal Defuse the Inflation Threat?
Stock Markets: Can a US-Iran Deal Defuse the Inflation Threat?
By:Ilya Spivak
Stocks pushed higher amid reports that the US and Iran are on the verge of a breakthrough deal. Will it really help?
- The stock market was buoyed by reports that the US and Iran are close to a new ceasefire deal
- Bonds, the US dollar, crude oil and gold prices continue to warn about bubbling inflation risks
- Traders may finally face up to macro headwinds as the Q1 earnings season comes to a close
Relentless Wall Street optimism stood out from other major markets yet again. The pattern has become a familiar one in recent weeks, with stocks levitating higher while other benchmark assets remain concerned about inflation stemming from the energy shock triggered by the US-Iran war and its spillover into broader prices.
Signs of exhaustion persist even as stocks push higher. The bellwether S&P 500 rose for a seventh consecutive day and hit a new record high. However, this string of gains has come alongside diminishing volumes and “negative divergence” on the relative strength index (RSI), pointing to fading momentum. Still, an actionable topping signal is absent for now.
Stocks refuse to back down but other markets remain worried
The latest push higher came courtesy of a an Axios report claiming that a deal to extend by 60 days the ceasefire between the US and Iran is close at hand. During the pause in fighting, the two sides reportedly resolved to launch talks on the future of Iran’s nuclear program.
Stocks promptly flipped intraday losses into modest gains and held onto them into the close. However, crude oil ended the day little-changed, natural gas rallied, gold and the US dollar remained locked in familiar ranges, and Treasury bonds struggled to sustain an intraday bounce. That hardly looks like confidence in imminent de-escalation.
In fact, the price for WTI crude oil futures contracts expiring in December rallied even as the front month July contracts recorded a small loss. This suggests that markets do not believe that a ceasefire – even one that reopens the Strait of Hormuz – will not do much to relieve inflationary pressure, at least for the foreseeable future.
When will stock market sentiment finally give way?
Now the critical question for traders seems to be when sentiment on Wall Street will catch up to what the other markets are already signaling. The narrow semiconductor-led rally from wartime lows over the past two months came amid breathless AI buildout enthusiasm. With the earnings reporting season ending, a window may open for just that.
US inflation and growth data highlighted economic pain from the inflation shock. April’s edition of the Fed’s preferred PCE price growth gauge echoed CPI and PPI figures showing surging energy costs spilling into core prices. First-quarter gross domestic product (GDP) growth was revised lower, with markdowns for consumption and business investment.
More of the same seems likely from ISM manufacturing and service-sector purchasing managers index (PMI) surveys due next week. Analog figures from S&P Global pointed to blistering inflationary pressure in April. Signs of a softer labor market probably won’t help. A rise of 96,000 in nonfarm payrolls is penciled in for May, the smallest in three months.
Ilya Spivak, tastylive Head of Global Macro, has over 15 years of experience in trading strategy. He specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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