- Trump’s address offers little reassurance apart from fresh escalation
- Oil futures jump back above $100 as Trump has no plan for opening Hormuz
- Dollar also reverses higher, stocks and gold tumble as risk appetite sours
Relief rally falters after Trump’s Iran speech
It didn’t take long for the relief rally to run into trouble again as optimism about a resolution to the Iran conflict turned into fresh anxiety about where the war is headed following President Trump’s primetime address to the nation yesterday. Markets were buoyed in the run up to Trump’s speech after he had suggested that the war could end within two-to-three weeks.
However, although he stuck to that timeline in his address, he offered no specifics on an exit strategy. Neither did he give details about the negotiations with Tehran other than to say that “discussions are ongoing”, nor did he mention how the Strait of Hormuz will be reopened or whether ground troops will be used.
Instead, the President vowed to hit Iran “extremely hard” and “bring them back to the stone ages”. Trump also renewed his threat to hit Iran’s power plants and repeated that the United States doesn’t need the Strait of Hormuz, saying that it will “open up naturally”.
The aggressive tone took most investors by surprise as there was hope that Trump would go a step further to try and calm markets but ended up undoing most of the bounce in stock markets, and more importantly, reversing oil’s decline.
Trump fails to defuse geopolitical tensions, oil jumps
Crucially, there is heightened uncertainty once again about how much dialogue there is between the two countries as Iran is dismissing claims by Trump that the Iranian president has asked for a ceasefire.
Moreover, Trump is threatening to pull the US out of NATO amid his anger that America’s allies are refusing to join the war against Iran. Whilst the US may be able to survive without the crucial flow of oil and gas through the Strait of Hormuz, a permanent restriction on the passage of ships will keep global energy prices elevated as other countries, namely in Europe and Asia, strive to find alternative sources of supply.
There have been some positive developments on this front as the UK is due to host talks today with 35 countries on forming a coalition to secure the Strait. But there are doubts about how much can be done without the assistance of the US, although Trump has said “we will be helpful”.
Nevertheless, without a strong commitment on this by the Trump administration and a major escalation looking likely before there’s any de-escalation, oil futures are soaring again, with WTI pushing above $106 a barrel and Brent crude briefly hitting $108.
Stocks and gold knocked down
In equity markets, Japan’s Nikkei 225 index slumped by 2.4%, erasing this week’s gains and European bourses have opened in the red. On Wall Street, this week’s powerful rally in tech stocks will likely come to an end today as Nasdaq futures are down by about 1.5%, while S&P 500 futures are 1.2% lower.
Gold’s rebound is also looking shaky, with the precious metal diving below $4,700 after repeated failed attempts at breaking above $4,800.
Dollar shines again as Fed seen on hold
The US dollar, on the other hand, is once again capitalizing on the increased risk aversion, recouping a good chunk of the losses from the previous two sessions against a basket of currencies.
A solid set of economic indicators out of the US yesterday is likely contributing to the rebound. Private employment rose more than expected in March according to the ADP report, potentially pointing to a strong bounce back in Friday’s payrolls numbers. Retail sales also beat expectations, although the reading was for February, which pre-dates the Middle East conflict, while the ISM manufacturing PMI was slightly stronger than forecast in March, with the prices paid index jumping to the highest since 2022.
Fed rate cut expectations were pared back after the data and even further after Trump’s speech. Markets now see the Fed staying on hold for the rest of the year and this view was reinforced by St. Louis Fed President Alberto Musalem in remarks made on Wednesday.
Yen and pound unable to sustain gains
In other currencies, the yen is finding itself on the backfoot once more, with the dollar heading back up towards 160 yen, which was breached last week and only prompted somewhat stronger language for intervention by Japanese officials.
The pound has also turned lower on Thursday, slipping towards $1.32 after being boosted above $1.33 yesterday from commentary by Bank of England Governor Andrew Bailey, who hinted at the possibility of a “precautionary” rate hike even as he warned about weaker growth.