Dear Trader,
The Iranian Supreme Leader and most of his cabinet were killed in a US-Israeli strike Saturday morning. As of this writing on Sunday, Trump's only public statement is a Truth Social post: "we will pinpoint bomb all week or longer if needed." A few ships in the Strait of Hormuz have since been struck and the strait is effectively blocked.
This is the most unprecedented act of its kind since the removal of Saddam Hussein in 2003. I can't begin to imagine what life has been like in Iran or the uncertainty people there are living through right now. My sincere hope is they find strength and unity in this difficult time.
The situation is fluid and anything I write here is a snapshot in time. That said, here's how I'm thinking about this as of Sunday, and what I'm watching as the week unfolds.
The Strait of Hormuz being effectively blocked on a risk management is problematic short term for oil and natural gas markets. Ships were stacking up and some insurance companies wouldn't cover passage. Twenty million barrels a day flow through there from Saudi Arabia, Iraq, Kuwait, UAE, and Qatar. That doesn't go to zero permanently, but it’s unclear how long it will last, and that uncertainty is what the market has to price.
Oil and Gold gapped up as expected on the futures market reopen. The Asian and Europe sessions are the first real money reactions. On the Asia reopen, US Treasuries gave back their initial knee jerk “flight to safety” rally and have turned negative. That is a tell to me.
I'm Watching the Dollar
The US Dollar, Swiss Franc and Gold should stay bid while there is still uncertainty. This is a conventional geopolitical shock. Flight to safety in a stable currency. That's the contained scenario. However If the Dollar weakens while gold stays strong with US Treasuries not holding their safe haven bid, we're in a different situation. Remember the Macro Flash Cards… It means the "Sell America" trade just got new fuel. If that happens, stocks will have a very hard time rallying.
If oil stays bid too long, it's inflationary. The Fed doves go silent. Rate cuts get harder to justify and the long end sells off. We're at risk of the loop where stocks, bonds, and the dollar all go the wrong direction at the same time.
Eventually this uncertainty will clear. A major source of Middle East instability was just removed. The fundamental oil picture was bearish before Saturday and it's still bearish underneath the chaos. As the uncertainty clears, the play is to selectively buy stocks, sell oil. It’s just a question of when and from what prices. But "eventually" could mean weeks, it could be longer.
This action took me by surprise. Trump ran an anti-foreign-war campaign and usually focuses on easy quick fixes like cutting taxes. Our D.C. insider Frank put it to me directly: “This didn't happen overnight. The Iranian regime has been the largest destabilizing force in the Middle East for decades, and reportedly 90% of Iranian citizens supported change. There was clearly a plan. Whether the succession holds is the question that matters now.”
I'm treading lightly. Watching the dollar. Watching “safe haven” trades. Watching the tanker trackers. Letting the price action guide me as much as the news.
Tim