First Light News: TACO Monday, Anybody?

Trump Pulls the Pin – for Now

A bombshell social media post from US President Donald Trump landed on Monday, instructing the Department of War to postpone all strikes for five days after claiming ‘very good and productive conversations regarding a complete and total resolution of our hostilities in the Middle East’.

As you can see from Trump’s post below, specifics were limited. The morning leading up to the President’s post began grimly, with futures pointing sharply lower amid fears that Trump would make good on his ‘weekend’ threat to obliterate Iranian energy infrastructure by midnight on Monday. However, shortly before the opening bell yesterday, he emerged from the White House and announced that the US had held productive discussions with Iran and that a five-day window had been opened for negotiations – apparently to the surprise of most people, including Tehran.

I am far from an expert in conflict strategies, but could this not be a ploy to buy Trump time to get his ducks in a row before invading Iran? Five days provide the President time to get troops in position for a weekend assault.

Iran’s parliament speaker immediately poured cold water on Trump’s claim, calling the entire thing fiction and insisting no talks had occurred. Tehran’s foreign ministry, however, acknowledged that messages had passed via third-country intermediaries but stopped short of confirming direct contact. The result is a market pricing in de-escalation on the basis of claims that one party disputes entirely.

Markets Take the Bait

A single social media post was enough. All eleven sectors of the S&P 500 closed higher, with consumer discretionary leading the charge, up 2.5%. Airline stocks were flying (excuse the pun) and cruise lines had a particularly decent afternoon, with Norwegian surging more than 6% and both Carnival and Royal Caribbean gaining well over 5% as the travel sector latched onto any sliver of geopolitical hope. The relief trade was real, even if its foundations were not.

In fixed income, US Treasuries staged a dramatic reversal. Two-year yields swung more than 22 bps from peak to trough, marking the largest single-day range since August of last year, before settling around 3.85%. The USD weakened broadly, with the GBP and EUR catching a solid bid.

As you would expect, oil prices were slammed following Trump’s post hitting the wires, ending Monday lower by 9.4% (WTI) and 8.7% (Brent Crude). Spot gold and silver rebounded higher on the news, with the former recoiling from a clear-cut AB=CD support area between US$4,063 and US$4,231.

Five days is a short clock. If talks remain as vague as they appear, and if Iranian missiles continue to threaten Hormuz shipping, yesterday’s rally risks looking premature.

Day Ahead: PMIs and Fed Speak on Deck

While the core focus remains on geopolitical risk, sizeable divergences across the March manufacturing and services PMIs would be needed to influence price action today. The PMIs serve as the first read on the economy since the Middle East conflict began. Interestingly, every single PMI reading – for the eurozone, the UK, and the US – is expected to come in lower than February’s data.

The more telling signals will likely come from the sub-indices rather than the composites. Input price components will be closely watched for evidence that energy cost pressures are already feeding through to business margins, while new orders and forward expectations will indicate whether firms are beginning to pull back on activity. A combination of weakening orders alongside accelerating cost pressures would be the clearest early confirmation that stagflationary dynamics are taking hold – and that is precisely the scenario central banks are most poorly equipped to respond to.

Regional divergence may also prove more market-moving than any individual reading. Should European PMIs deteriorate meaningfully more than their US counterpart – plausible given the US being relatively insulated as a net energy producer – the USD could strengthen. For the GBP, the UK reading lands just ahead of Wednesday’s CPI inflation print, meaning a soft PMI combined with an upside surprise in inflation would sharply crystallise the BoE’s dilemma: slowing growth, rising prices, and very little room to respond to both.

Fed Governor Michael Barr is also speaking today. Any commentary on how energy prices might feed through into inflation could meaningfully shift rate expectations. We also had Governor Stephen Miran hit the wires on Bloomberg TV yesterday and said there is not enough information to draw conclusions on Iran, that policy decisions should not be based on headlines, and that the Fed has to look 12-18 months out due to the monetary policy lag.

Written by FP Markets Chief Market Analyst Aaron Hill