As the conflict in the Middle East enters its fourth week, there is more than a sense that Trump is making up his policy “on the hoof” and markets are edging closer to losing their relative composure.
There are contradictions in his various statements, and his policy appears to be primarily driven by what is happening to the price of oil and the equity markets.
The threat to “unleash hell” on Iran if they don’t do a deal has been postponed for 2 weeks, as Trump cited that they “want to make a deal so badly but they’re afraid to say it”
This move by Trump increasingly looks like a response to the oil price hitting $113 per barrel. The initial reaction saw the price drop back to $93 per barrel. The climbdown in the price was however only short lived, (the current price at time of writing is $104 per barrel) as markets doubt just how true his claims about an impending deal actually are.
These doubts have been further fuelled by the Iranians who have flatly denied that they are having any dialogue with the US and they have made a counter claim that “Trump is negotiating with himself”.
The rhetoric ramped up further with Trump saying, “they now have the chance… to permanently abandon their nuclear ambitions and to join a new path forward. We’ll see if they want to do it. If they don’t, we’re their worst nightmare”
It appears that we are therefore approaching a crossroads, where there will either be a de-escalation by Trump, no doubt wrapped up with claims of victory, or we will see an escalation of the crisis with US “boots on the ground” being deployed.
At present we think that de-escalation is the more likely outcome. To coin a phrase, it looks like Trump is trying to “find an off ramp” and his pressure on Iran to do a deal is at odds with his obliteration rhetoric. Add into the mix his moniker of TACO (Trump always chickens out), the market jitters and his plummeting approvals rating in the US and it is not hard to see why de-escalation is an option.
Of course, we cannot discount that he will choose the escalation option, but this would surely only be taken if there were a clearly communicated policy targeting a short term objective. An open-ended war just does not seem likely and is desirable to no-one, apart from maybe Israel.
It is hard to keep perspective with the bombardment of news that we all endure but the following chart shows that the market stress, represented by the price of oil, is not yet at the crisis levels seen when Rusia invaded Ukraine:
Indeed, if we look a little deeper, the real (or inflation adjusted) price is showing little stress at all:
Whilst markets have sold off, it is also important to understand the context, and as the following chart of the FTSE 100 Index shows, the value has only fallen back to where it was at the turn of the year:
Whilst we are not claiming there is nothing to be worried about, we feel that it is important to look carefully at the market reaction and measure what is happening. The market reaction of just over 1 year ago to “Liberation Day” tariffs was far more exaggerated and painful than what we are currently seeing. As ever though we remain ready to act should matters worsen significantly.
Where are markets up to?
The rolling 12 month % cumulative returns in local currency from various indices is shown in the following chart:
Where are the portfolios up to?
The portfolio performance, net of fees, to close of business on Thursday is as follows:
As ever, if you would like to discuss any aspect of your portfolio, please do not hesitate to contact us on service@blythefinancial.com.
