The opening of the Strait of Hormuz, or the lack thereof, continues to dominate fluctuations in investor positioning and the definition of leadership in stock market momentum. The first round of negotiations between Iran and the USA did not produce a quick agreement; only a surrender by Iran would have led to such an outcome. The fourteen-day term could be extended, and a resumption of the air campaign seems unlikely. At the same time, it seems difficult for Iran to impose a toll mechanism on the Strait beyond the current negotiation phase.
A naval blockade operated by the American Navy on Hormuz, closing transit even to Iranian tankers, would accelerate the erosion of energy stocks, especially in Asia. The halt to the passage of Iranian tankers reduces supply by about 2 million barrels per day. Net of the current return above $105 for both Brent and WTI, the futures curve structure probably has a buffer of another two or three weeks before having to price in increases in a more structural and lasting way.
Last week, following the ceasefire, the upward reactivity of higher beta sectors and styles appeared as an indication of the holding of important supports within the stock market. The rebound in the semiconductor sectors in the United States and financials in Europe is proof of this. Performance dispersion is increasing, the macro themes driving market trends are becoming more specific, but accompanied by a higher risk premium; equity valuations have indeed returned to interesting levels.
On the macro front, inflation risks have become concrete. US CPI inflation rose by 0.9% in March, in line with economists’ estimates, the sharpest increase in the last three and a half years, while Core CPI rose by 0.2%, below the 0.3% forecast. The model developed by the Cleveland FED in estimating the current level of Core PCE, the price index followed by the FED, signals a rise to 3.1% year-on-year in which second-order effects, beyond energy and transportation costs, have not yet been passed on to wages and services.
This week in Washington, the IMF spring meeting begins, where we will have greater visibility on growth and global inflation impact estimates according to different scenarios of duration in the Hormuz tensions. If the IMF was, before the conflict, about to raise growth estimates, a U-turn towards a decline is now certain even in the base scenario. The base scenario on FED Funds remains instead a prolonged pause at the current level, a level that in the latest FOMC minutes is still defined as above neutral and therefore restrictive. The Fed can use this configuration to monitor the next phase of macro uncertainty. The University of Michigan consumer confidence index for April fell to a historic low. Consumer spending remains vulnerable to worsening financial conditions for lower incomes, while for middle-high incomes the reduction in available savings could reduce resilience. On the other hand, tax refunds being distributed to consumers these weeks, together with the resilience of the labor market, where the number of unemployment benefits remains contained, are factors that can provide stability to the consumption trend.
Signals of deterioration in consumer confidence also emerge in Europe, financial conditions continue to tighten, and the latest economic data have surprised negatively. As for the business sector, economic activity remains overall positive and investment dynamics in Germany continue to develop encouragingly. Upcoming business confidence surveys will be decisive. Furthermore, the outcome of the elections in Hungary could bring the peace process in Ukraine closer.
The ECB’s rhetoric remains stringent on the need to raise key interest rates, which unlike the Fed are already at a neutral level. The base scenario for the rise in aggregate inflation is increasingly tending towards 4%, and the market prices in two rate hikes in the next six months. However, long-term inflation metrics remain stable; a scenario with a rise in the coming months followed by one or more cuts early next year is entirely plausible.
This week the corporate earnings releases begin. Recent analyst revisions still indicate profit stability; indeed, in the technology sector preliminary indications are encouraging with the investment cycle continuing at solid rates. The financial sector will be in the spotlight; investors will be very attentive to indications of any deterioration in consumer credit quality and loans to the software sector.
