Kamal Ghorui
What do markets know that we don’t? Ever since Trump announced a two-week ceasefire on April 8, they’ve been inching up. Sensex has reclaimed half of the ground it lost during 40 days of fighting.
US indices, meanwhile, have touched record highs. What explains their euphoria? Is the war well and truly over, despite occasional tough talk by Trump and Iran? It’s hard to say, but signs are promising.
For one, Iran has held its fire, even after US blockade of Hormuz Strait. Note that it has no dearth of easy targets, what with hundreds of ships and tankers, and thousands of sailors, stranded in Persian Gulf.
That suggests it is willing to bear some provocation this time. Instead of claiming tolling rights, it is now talking about letting ships pass unmolested if they stick to the Strait’s Omani side. US has also shown restraint in the blockade – it hasn’t boarded or seized any vessel so far.
Another round of Iran-US talks looks likely. And Trump has clearly used his influence to get Israel and Lebanon to talk at the highest level, which will, hopefully, remove a major hurdle for a deal with Iran.
Those are the visible signs. But markets are also pricing in invisible factors. For example, what happens if the blockade continues without a deal?
Reports suggest Iran has enough onshore storage to continue pumping crude for another two months, without shipping a single barrel.
But Trump can’t wait that long, because US pump prices would become unbearable. In fact, crude, after slipping below $100, is sticking to the $95-96 level.
And IMF sees it averaging around $82 this year, in the best case scenario, which would be 30% over its Jan estimate. That will hurt global growth, and should, ordinarily, depress markets, but a peace deal would ensure things don’t get any worse. Hence the cheer.
But let’s face it, markets work on sentiment, and greed. They dislike war, but hate uncertainty. In March 2003, US indices jumped once it became clear that Bush and allies were going to war in Iraq. Clarity alone gave them a high.
Trump’s done a fair bit of peace talking the last few days.
On Wednesday, he wrote he’s trying to “permanently open” Hormuz for China, and others: “President Xi will give me a big, fat, hug when I get there in a few weeks.” Maybe, there’s clarity for markets in that.
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