McGeever: ROI-Ceasefire brings relief to the market, but outlook is still sobering.
It is not surprising that the oil prices have plummeted and global markets have seen a huge rally of relief after 'the ceasefire' in the Iran War. Once the initial euphoria has dissipated, what follows is less certain and less rosy for investors.
The euphoria will dissipate quickly. The economic damage caused by the past six weeks will linger long after the two-week ceasefire has ended.
Will it undermine stock market bulls' confidence that underlying growth and earning outlooks are generally solid or their belief that the TACO – "Trump always ducks out" – trade will always present an opportunity to push risk assets up?
Perhaps not. The Nasdaq returned to its previous level on Wednesday, before U.S. forces and Israeli forces attacked Iran in February. And the S&P 500 wasn't far behind. The "buy the Dip" mentality is what has kept Wall Street going through the past year of turmoil, including the "Liberation Day Tariffs" a few months ago.
The markets could be a bit ahead of themselves.
The TD Securities analysts wrote that "normal?will be very different than pre-conflict. Normalization of energy, inflation, growth and monetary policies will take many, many months before it is clear."
Long Road to Recovery
This is a reasonable position.
Prices of fuel at the pump, jet-fuel, utilities and fertilizer will not fall as fast as they did in the last six weeks. Energy costs are much higher for households and businesses than they were on February 27. This will squeeze profits and spending.
The price of U.S. crude is down 20% from its peak reached during the war last month. Wednesday's drop was its largest daily decline in five years. It is still 40% higher than before the war and 60% more than one year ago.
As the Federal Reserve's target of 2% is met, the annual U.S. rate of inflation will likely be around 4%.
Experts estimate that at least 10,000,000 barrels of oil per day, or about half of the pre-war level, will be required to achieve any meaningful reduction in oil prices. This is unlikely to happen anytime soon.
The impact of the economic shock is not limited to oil prices.
The stagflationary forces will be more intense than before the war. The fiscal position of governments has deteriorated, too, in aggregate, due to the increase in debt servicing and crisis spending.
The policy uncertainty will likely remain high, as central banks are less likely to lower interest rates while some are more inclined to raise them. The minutes of the Fed’s policy meeting held on March 17-18, released by the Fed on Wednesday, brought this into sharp focus.
David Skilling, Independent Economics, said that "This (war), will be a material shock for what was a resilient global economic system."
Only CERTAINTY IS UNCERTAINTY
The U.S. Policy Uncertainty Index clearly shows that beyond energy and inflation, the broader policy uncertainty has increased since President Donald Trump's election win in 2024. Economic agents are finding it more difficult to forecast, plan, and make decisions.
The International Monetary Fund's and World Bank's Spring Meetings next week in Washington are all the more important because of this backdrop. IMF research shows that large-scale wars usually lead to more permanent economic damage than other shocks – like sovereign debt, bank, or currency?crises – and not just in countries directly involved in the conflict.
Investors who have a shorter time horizon might ignore these issues. No matter how fragile the ceasefire may be, it is still a positive risk/reward.
Stuart Kaiser, Citi's head of equity trading, says: "That said, we're not 'all in' on risk (and) wouldn't chase the S&P500 higher."
It seems prudent to tread with caution in the face of such a volatile economic environment.
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(source: Reuters)
