It Ain’t Over ’til It’s Over - Our weekly cross-asset views

This was week #5 of the Iran War and markets remain dominated by the rollercoaster war newsflow. Hopes for a quick end of the war struck on Tuesday (with some positive signs from Iran) and triggered a nice risk-on move boosted by quarter-end rebalancing and negative gamma forces. But D. Trump speech did nothing to reassure after he pledged more aggressive action in Iran. Behind, the “2 or 3 weeks” additional time he mentioned, two risks remain elevated: 1/ US military actions on the ground and retaliation risk on infrastructures by Iran, 2/ we fail to see an acceptable game plan for both the US and Iran regarding the reopening of the Strait of Hormuz… (Still this Friday morning a French-owned container ship has reported it has exited the strait of Hormuz, a sign that diplomacy is not dead).Our weekly performance table appears much rosier than the newsflow and than the gloomy expectations we hear from clients. The front month Brent future price is down 3% wtd to 109$ after a peak at 119$, govies rallied in tandem with stocks and gold, real rates and vols are down and the US dollar (DXY) is flat. Crude oil price remains the key market driver, especially for Asian markets that underperform significantly this week, and with a bit less intensity this week for the US and European markets. European and US equity indices deliver their best week (a short one) since the start of the war (SPX +3,4%, SXXE +3,8%). Credit spreads are down 30bps wtd in line with implied volatility across assets, including for bonds (MOVE down from 112 to 84), our RPI is down and close to neutral levels (55%).Needless to say that uncertainty remains extreme despite D. Trump’s deadline for the end of the war. The resilience of risk assets and positive asymmetry to goods news contrasts with the global energy and trade shortage the world economy is facing. Real money managers are in a wait and see mode and “complacency” is a word that gets increasingly heard in our clients’ conversation. We continue to believe that things will probably get worse before they can get better. Markets usually work with hot spots…the end of the war is #1, inflation/central banks #2, and growth #3. As for the latter, the difference between slower growth or no growth (ie. high recession risk) will be a huge one.