Back to square one for ROI? Mike Dolan: Markets predict the end of the Iran war.
The International Monetary Fund and global investors seem to agree that the Iran War is over, barring the shouting. Energy?markets are less certain, and there may be a lot of shouting. But many asset prices are back to square one.
IMF's difficult task of predicting global economic growth in the face of a Middle East conflict and an energy shock has left as many questions and answers as it has scenarios. Choose your favorite.
What the Fund didn't do was more powerful than what it did.
The IMF did not change its forecast of global GDP growth for 2027 from its previous update in January, three months prior to the war. It has indeed cut this year's growth and as a consequence, the starting point is lower. Next year, the Fund expects a similar development to what it saw in January before the war and in October. That is, a 3.2% global growth.
Many markets made their decisions even before the forecasts on Tuesday.
Wall Street stocks returned Monday to the pre-war levels from February 27, completing a round trip of 565 points, or nearly 10%. The VIX, or implied volatility index, has dropped to its lowest level since February.
The MSCI All Country World Index, which captures global?stocks, is not yet back to the previous record highs - but it's only 1% away. The crucial euro/dollar rate has also returned to levels seen in February.
Too much, too soon?
In recent weeks, much has been said about how little the oil crisis affected corporate earnings predictions for full-year. The aggregate 2026 growth estimates for earnings have risen by 2-3 percentage points, thanks to upgrades of tech and energy firms.
Calendar - Growth forecasts for 2027 are still at 18% in the U.S., and 11% in Europe.
The 12-month forward price/earnings values for the S&P 500, MSCI All-Country and MSCI World Index have been discounted by more than 10% since the beginning of April.
It was hard to resist the temptation to ignore the war and bet on an?eventual escalation, while focusing on the coming year.
BlackRock, the world's biggest asset manager, switched back to an overweight position this week in U.S. shares and emerging markets.
'TREACHEROUS MOMENT'
Of course, it's not like nothing has changed.
Front-month crude futures remain up by a third, and prices for natural gas and fertilisers remain high. Jet fuel shortages are feared by airlines.
Even the IMF admits that the longer Middle East's energy crisis persists, more "adverse scenario" scenarios will be seen.
Ken Griffin, a billionaire investor who warned on Tuesday of "a dangerous moment", believes that the closure of Strait of Hormuz will lead to repression in the global economy.
The market is still unable to predict the future price of oil. Brent crude futures for this year and the next appear to be normalizing. Although they are still 10-15% above February levels, quick rule-of thumb models suggest that this would only reduce global GDP growth by 0.2-0.3 percentage point.
It's not enough to let portfolios?go to the ground, no matter what you think about inflation or wider political consequences.
Interest rates and bond markets are still at pre-war levels. The lingering threat of inflation and the possibility of central bank rate increases keep them there.
Federal Reserve futures market only predicts a 30% chance that rate cuts will resume by the end of the year. Mortgage rates are also on the rise, and corporate bonds are being rattled by concerns about private credit.
Bank of America's survey of global asset managers this month revealed a clear reversal in their optimism for the new year. Sentiment gauges have slipped back to levels seen last summer. Expectations of inflation have also risen.
The weighted-average forecast for crude oil prices at year's end was $84 per barrel. "Long oil" and long global chip stocks are the two most popular trades in the world.
Fewer than 10% of the funds surveyed anticipate a recession. The average cash level remained at 10-month-highs in January, but they are still well below the extremes of last April's tariff shock and 2022's invasion of Ukraine.
This is not exactly complacency, but it's also not a herd in panic.
The daily obsession of second-guessing conflict will continue, even if it becomes less price-sensitive. But market de-escalation has already begun. Only time will tell whether that is premature.
Save the date: On April 23, at 1300 GMT/9 a.m. ET, ROI columnists Mike Dolan, and Jamie McGeever, will join LSEG in a webinar, "Markets unpacked with open interest: Rethinking safety havens during uncertain times." Sign up by clicking here. You like this column? Open Interest (ROI) is your new essential source of global financial commentary. Follow ROI on LinkedIn and X. Listen to the Morning Bid podcast daily on Apple, Spotify or the app. Subscribe to the Morning Bid podcast and hear journalists discussing the latest news in finance and markets seven days a weeks.
(source: Reuters)
