financial insights - fundamental market factors

I’d like to start a thread with some geopolitical observations. I’ll try to share my thoughts on the market and my view of the fundamental situation here.

Let’s start with a pressing issue: the current situation with oil prices.

Everywhere you look, people are reporting it as a sensation that oil prices have exceeded $100 a barrel.

In this regard, I’d like to remind you that there was a time, from 2011 to 2014, when oil traded steadily above this level every single day for three years (see the chart below), and this was considered the norm back then (the old-timers will remember it well ). And this is despite the fact that those $100 are not equivalent to today’s $100, given the accumulated dollar inflation over the past period.

So the figure of $100–110 per barrel, in itself, will certainly not destroy the global economy. However, a real and prolonged oil shortage on the market could lead to serious consequences. But in that case, the price would not be $100, but at least $200.
For now, however, such a scenario seems rather unrealistic.

Macron: Navigation through the Strait of Hormuz is only possible in coordination with Iran, and once this is all over.
France will not join the US at this stage.

It is entirely up to Iran now whether shipping will continue through the strait or not. If it is ‘closed’ for several months, a shortage of oil could develop on the global market that would inevitably plunge the world economy into the deepest recession since the Great Depression.

So let’s imagine the situation: Trump announces yet another victory over Iran and calls off the operation. But why on earth would Iran, in response, open the Strait without receiving some very substantial compensation? Absolutely no reason!

Iran’s top political leaders are stating that things will never be the same again in the Strait of Hormuz. It is not entirely clear what they mean, but it is clear that Iran will play this trump card to the full. And in fact, Trump does not yet know how to deal with this.

Against this backdrop, oil continues to hover above $100 a barrel. Global dissatisfaction with Trump’s actions is growing. And it remains unclear how this will ultimately play out for him.

Trump recently stated that he was surprised by the resilience of the US stock market in the wake of the military operation in Iran, as he had expected the indices to fall more sharply than they actually did.

I have a hypothesis that this may be due to the quarterly expiry of futures and options on the US market, which is due to take place on Friday. The market may be being held back from a sharp fall in anticipation of this.

After all, the prolonged military operation came as a force majeure for many market participants, and they were clearly unprepared for such oil prices, disruptions to global trade due to the disruption of shipping in the Strait of Hormuz, and so on. Consequently, market positioning did not take these events into account.

It is now clear that the operation is dragging on, with no end in sight. And once the expiry date passes, a serious bearish move in the indices may well begin. We shall see whether this hypothesis proves correct.

So far, the situation is not in Trump's favor: gasoline prices are rising along with oil, and stocks are falling—a combination that is extremely unwelcome to households (voters)—while an end to the conflict with Iran is not yet in sight.

The probability that Trump will be impeached before the end of his term is now estimated by traders at 72% on the Kalshi platform. Bets on impeachment have increased significantly since the beginning of the military operation against Iran.

Trump on NATO:
I’m disappointed in NATO.
It’s not good for partnership if they’re not going to help.

Since NATO doesn’t want to help Trump unblock the Strait of Hormuz, and he’s disappointed in his alliance partners, maybe he should make a bold knight’s move and finally implement that wish he had at the end of January? I mean the annexation of Greenland to the United States.

In the media space it would overshadow the failures of the Iranian campaign for at least some time. Plus he could say that it was under him that the United States grew in size, gained control over a huge amount of natural resources, etc.

So why not give it a try? International relations are already in complete chaos anyway. If you’re going to go all out — then go all out! As they say: nothing ventured, nothing gained… or “who knows what the devil might tempt him to do”.

Iran's successful tactic—by closing the Strait of Hormuz to shipping—has dramatically increased the cost of this military operation for its adversaries.

The surge in oil and gas prices has led to a sharp drop in government bond prices in Europe and the United States, which in turn has significantly raised the cost of servicing government debt for these countries' governments. And naturally, heavily indebted households in these countries have automatically come under pressure as well.

Let me give you the following example: before the war with Iran, the Bank of England was planning to continue cutting rates, but now the market is already pricing in that it will have to raise rates—and more than once—this year.

Traders are now fully (100%) pricing in three rate hikes by the Bank of England this year.

And just look below at what has happened to the yield on UK 2-year government bonds over the past three weeks. At the end of February they were yielding 3.5%, and now it's almost 4.5%. Anyone who follows the market understands how massive this jump is.

The IMF has already sounded the alarm about a new wave of inflation—and quite justifiably so.

As long as Iran manages to keep the Strait of Hormuz closed, time is working in its favor.

Trump is fuming and raging against NATO countries, calling them weaklings!

I think it's time for him to move from writing posts to taking action and punish NATO itself.

To start, he needs to remember his favorite word — "Tariffs" — and raise them to at least 50% for European partners.

And it wouldn't hurt to take my advice and take Greenland from this paper tiger!

And then — why stop there! There's plenty more you can come up with.

It's time to go all out and live it up, leaving all the old stereotypes behind!

Gold and silver have crashed hard in price this week.

Gold has already dropped about $1,000 from its peak of $5,500 — that’s almost 20% down — while silver has fallen nearly 50% from its high of $121.

And the funniest part is that this week’s plunge in precious metals happened exactly while everyone was talking about a sharp global inflationary spike due to the war with Iran.

Trump to Iran: 48 hours or strikes on power plants

Washington has issued a tough ultimatum to Tehran: fully open the Strait of Hormuz within 48 hours. If refused, strikes will be launched on Iran's energy infrastructure, starting with the largest facilities.

Tehran responded symmetrically: any strike on power plants will put the entire US energy infrastructure in the region under threat of attack.

What this means for markets:
About 20% of global oil transit passes through Hormuz – about 17-18 million barrels per day. The strait has been closed since the first strikes. There are no alternative routes of this volume.

If the ultimatum is not met and the US launches strikes, the market will face a scenario of unpredictable escalation: Iran will strike infrastructure in the Gulf, tanker insurance rates will skyrocket, and physical deliveries will halt.

48 hours is not rhetoric. It's a window after which oil, gold, and crypto will trade under conditions of a full-blown geopolitical shock.

What do you think about US30 especially at the current resistant zone?

A few days ago, I wrote about the collapse in the UK government bond market due to sharply rising energy resource prices.

A similar situation is now unfolding in the Eurozone with German and French government bonds, where yields on long-term bonds have risen to near 20-year highs. I had previously noted that France's public finances are in a very dire state, and the situation there is now deteriorating rapidly.

The crash in European sovereign debt markets has, of course, also affected the money market. The annual interbank lending rate Euribor has risen to 2.65% from 2.20% at the end of February / beginning of the military operation against Iran (see chart below).

And if this military operation does not end in the near future (which seems unlikely), the cost of interbank lending will continue to rise. The European Central Bank will then have no choice but to play catch-up with the market and urgently raise its policy rate. There are simply no other options here.

In summary, there are every reason to believe that Europe risks sliding into a very severe and deep recession. The current crisis is pro-inflationary, which means the ECB cannot put out the fire by cutting rates and turning on the "printing press," as it did, for example, during the COVID pandemic. Such actions now would only intensify inflationary pressure.

The other question is that at some point the ECB will still have to go down this path anyway, because the governments of the largest countries—where public debt already exceeds 100% of GDP—will simply face the reality that they can no longer service that debt due to rising sovereign bond yields. The choice will then be between sovereign default (for example, in France or Italy) or an inflationary tsunami. Most likely, the choice will be made in favor of the second option.

And that is how the second inflationary wave will form in the Eurozone—one that will be much higher than the one in 2022, which reached 10%.

Judging by Google search queries, there are growing problems in the US with servicing mortgage loans, as well as with the difficulty of selling a house.

The government has usually addressed such issues by lowering the Fed rate. Loans became cheaper, making home ownership more affordable. And those already with mortgages could refinance their loans at lower interest rates.

This time, it won’t work. Inflation was already preventing the Fed from cutting rates quickly, and now it will be even less likely to do so following the outbreak of war in Iran. The market is already pricing in the fact that the Fed will not cut rates this year. However, we cannot rule out the possibility that it will have to raise them if the war in Iran drags on and energy prices continue to rise.

At present, Trump’s statements today regarding positive negotiations with Iran appear to be nothing more than verbal interventions in the financial markets.

Yes, his comments have significantly improved sentiment in the stock and government bond markets and led to a fall in oil prices.

But without real action, words alone cannot reverse the downward trend in the market. The Strait of Hormuz remains closed, and it is unclear why Iran would open it just like that, having such a trump card up its sleeve.

Trump, as an experienced player, understands that Iran holds very strong cards, which is why he has been on edge these past few days.

For now, it looks as though Trump has indeed taken the bait and doesn’t know how to extricate himself from the situation...

So you think the markets just reacting to the signal itself or like having to face a 20% rise in costs all of a sudden? Like I was almost thinking the SP could fall to somewhere around 5503 (another -15% from here, roughly 20% drop, which is more or less peak-to-trough post-Liberation day (around -19%), but your argument makes way more sense.

I'm just worried we might see a little more downside in the SP because global demand has grown since 2011-2014 and bc some of the supply has been taken offline, which mean disruptions have a bigger impact.

A stock market crash is still on the horizon. I’ve already mentioned that problems are mounting in the US regarding mortgage repayments, as well as the fact that it has become difficult to sell a house.

Perhaps it is a combination of geopolitics and domestic problems in the US. I also foresee a stock market decline of at least 20%. The war in the Middle East will not end well for the US.

United States Existing Home Sales Arent home sales slightly up tho? & what if the increase in delinquencies increases the chances of a rate cut and re: will not end well for the US. - like that if that has largely been priced in or like you know represents another 15% drop but ultimately benefits the US.

Saw this on CNBC : Jamie Dimon: Iran war makes Middle East peace prospects better long-term

I think, if anything, it's worse for Europe bc they're so reliant on imports, while the US is a major producer and has access to cheaper Canadian oil via pipeline.

Idk, I honestly think so many people are against this war and against Trump that the desire to see him 'punished' and the US 'fall' is beginning to overshadow the reality on the ground, and as a trader I feel like you always have to watch out for those types of situations. Like do I think it'll be over next week and that we no longer have worry about the oil price or SP Futures? Ofc not, but I'm sort of leaning towards like "Ok maybe some of this is priced in, maybe the IRGC is seeing its capabilities get diminished, and maybe the reality of Europe and Asia's oil dependency means they'll eventually start to chip in, speed up the process".

In the meantime, Im just waiting for the dust to settle before opening more risk-on positions.

And now I'll show you one more thing that the media isn't writing about, but which can't fail to worry Trump.

Right after the start of the war with Iran and the surge in oil prices, government bonds of European countries and the US collapsed. Their yields shot up sharply. As a result of this rise, the yield on 30-year US Treasuries approached the 5% mark.

As you can see on the chart below, this is very close to the highs of the past almost 20 years. But there's a small nuance: in 2007, when the yield on 30-year Treasuries was 5.4%, the US debt-to-GDP ratio was around 60%, whereas now it's 120%. That means servicing the current debt at the same interest rates as back then is much harder today because of its sheer size.

It's no coincidence that Trump keeps yelling at the Fed Chair to cut rates. He wants to lower the cost of servicing the national debt, including by refinancing it at a lower interest rate. But Powell, in order to avoid the classic monetary policy mistake, refuses to do so — and especially under the current conditions.

That's why Trump needs to keep a very close eye on Treasury yields (by the way, in spring 2025 he admitted that he was doing exactly that when he triggered a market crash with his tariffs), especially on the long end, and try to prevent them from rising to 5.5–6%. Because such a move in the government bond market would most likely lead to a devastating rout in the US stock market.

The longer the Strait of Hormuz remains closed, the higher the probability that this will eventually happen. So Trump needs to hurry up.

Continuing the topic of growing problems in the US real estate market.

The number of people wanting to sell a house in the United States now exceeds the number of those who want to buy by 630,000 — a new record.

The chart shows that the number of potential homebuyers continues to decline.

In such conditions, to revive the real estate market, the Fed would need to significantly cut its interest rate to boost demand. However, amid rising inflationary pressure, this cannot be done.

Alternatively, home prices would need to fall substantially. And that is exactly the direction things are heading right now.

American indices turned a bit red from embarrassment on Thursday.

The S&P 500 returned to Monday’s lows, from which it had sharply rebounded after Trump’s verbal interventions.

At that time, I wrote the following:
“But without real actions, words alone won’t reverse the downward trend in the market.”

In the end, that’s exactly how it played out.

Meanwhile, the conflict is not only not ending, but risks fully spilling over into neighboring countries.

A real could happen in the markets.

Right after the close of the trading session in New York and the market falling back to Monday’s lows, Trump carried out yet another verbal intervention.

BlackRock believes that the Fed should cut rates to mitigate the consequences of the conflict in the Middle East.

Given this kind of rhetoric, it looks like BlackRock's asset management is clearly feeling the pain from the 9% drop in the stock market from its peak. That's why they're now begging the Fed to cut rates — just to prop up their sagging economy.

By the way, back in early March they already had issues with one of their money market funds, when they stopped allowing investors to withdraw their money.

And now, amid rising inflationary pressures, BlackRock is suggesting the classic monetary policy mistake: cutting rates.

In other words, they want the population to help BlackRock through the inflation mechanism, because they're apparently getting squeezed not only in stocks but also in government bonds, which have also fallen sharply over the past month.

I wouldn’t be surprised if soon other major players on Wall Street start begging the Fed to cut rates as well.