🤔 After the ceasefire news spread last week, US stocks, bonds, and oil moved in different directions—

US stocks (red line) outperformed US oil (green line), while US bonds (blue line) underperformed US oil.
To some extent, this trend reflects the “vote” by investors across the three markets on where the US-Iran war is headed:
1) Stocks are closest to liquidity. The market believes the core of US stock pricing is not in the Middle East, but in Washington.
So, the war is just an event—so long as risks remain manageable, asset volatility will eventually be repaired.
2) Oil is closest to geopolitical risk. The market doesn’t believe in easing that’s only spoken about; the Strait of Hormuz is still there, and physical risks haven’t disappeared—so supply issues will persist.
3) Bonds are the most interesting—they are closest to the policy costs, with the bet on a more complex rate-cut path.
Because the US is currently facing inflation problems and fiscal pressure, it means the US can no longer pass on the costs of war as cheaply as it did in the past,
and ultimately may end with the internal policy room in the US being further compressed.