Wednesday at 9am AEST in Australia was a moment for the books – a point in time at which the weight of an imminent war with Iran was replaced by market jubilation. No TACO (Trump Always Chickens Out) ever tasted better.
The mother of all relief rallies infected investors around the world. Within minutes, US stock futures jumped 2.3 per cent, gold soared, crypto’s price was on fire, Japan’s sharemarket shot ahead almost 5 per cent and Australia joined the party with a 2.8 per cent jump in the ASX200 index. The 2 per cent rise in our local currency was icing on the cake.
Australian shares are still a little below their pre-war level but are 2.5 per cent ahead of where they started the year.
The sharemarket war discount just evaporated, and the risk appetite returned in real time.
The oil price slumped more than 15 per cent to bring it under the $US91 a barrel mark to mark the agreement to at least temporarily reopen the Strait of Hormuz.
Investors are savouring this point in time, forgetting those niggling concerns about the returns from the billions being spent by the corporate artificial intelligence giants or any dangers around the rise in opaque private equity markets.
Those who had resisted the fear of the past month, held their nerve and mopped their sweat were rewarded for their bravery. It was a similar story to when Trump backed down on tariff threats last year, benefiting investors who stayed the course.
In contrast, those who buckled under the avalanche of negative news and were deafened by the market’s white noise will be licking their wounds on Wednesday.
Plenty of US high-profile talking heads have been capturing the media with warnings of economic armageddon, drowning out the cooler heads that cautioned against hysteria.
That said, there have been plenty of white-knuckle moments, not the least of which were delivered at the 11th hour, when US President Donald Trump threatened that “a whole civilisation will die tonight”.
Despite this and other recent pugilist social media pronouncements by Trump, the market has held up remarkably well – better reading Trump’s comments and calling his bluff.
Over the past couple of weeks, many have understood Trump was keen to end the conflict that has been so electorally unpopular in the US.
Wednesday’s hiatus will be viewed as the likely end of hostilities.
But there will probably be additional bouts of volatility between now and when the war is finally declared over.
The five-week blockade of a significant portion of the world’s supply of oil can’t be completely walked back, even if the Strait of Hormuz remains open. It has already damaged the world economy and will feed into inflation for months, even if we just witnessed the end of the war.
Costs across the supply chain have already become elevated as higher fuel prices have led to increases in the cost of everything from transport to fertiliser to packaging.
Whether or to what extent this in turn morphs into a slowdown in economic growth remains to be seen.
“If oil prices continue to fall and logistics normalise, markets can begin to unwind stagflation risks,” said Stephen Dover, chief market strategist and head of Franklin Templeton Institute at investment firm Franklin Templeton.
“A sustained retreat in oil prices would ease near-term inflation pressure at the margin. That does not suddenly change the outlook for Federal Reserve policy, but it reduces one of the clearest upside risks to US inflation,” he added.
But the immediate relief will feed into better earnings conditions for consumer stocks, banks and airlines in particular. Qantas’ share price soared 9.2 per cent by lunch on Wednesday, while Virgin Australia shot up almost 13 per cent.
The four big Australian banks experienced spectacular bounces led by National Australia Bank, which was up 4.4 per cent in early trade.
And the war’s biggest sectoral casualty, tech stocks, staged the most radical comeback. Australia’s WiseTech shares flew up more than 10 per cent and expectations are high for a revival in the US tech-dominated Nasdaq whose futures were up 2.8 per cent ahead of trading on Wednesday US time.
I’ll have my TACO with cheese and pico de gallo salsa.
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