Monday, Earthquake Warning in Advance

Source: Wall Street Intelligence Circle

— Asian markets open with panic trading, Europe tests the reality during its session, and when US stocks open, the market returns to reality.

Before the Monday market opened, news broke:

Iran stated that it had closed the Strait of Hormuz because Israel violated the ceasefire agreement. However, at the same time, Iran’s top negotiating delegation boarded a plane heading to Switzerland to meet with the Americans.

The market may see significant volatility next Monday—the Asian trading session will be relatively dangerous, but after the US stock market opens in the evening, sentiments could turn more optimistic. At Monday’s open, oil prices and safe-haven assets will be the first to react to the “closure of the Strait of Hormuz”; oil prices may gap up by $2–3. However, in the absence of further evidence of actual conflict, there’s a high probability that the first reversal will occur within half an hour. The key lies in the trend of the US dollar and US Treasury yields; many traders are closely watching the 101 level—if that is broken, it suggests the market no longer sees the Middle East as the main conflict, and risk assets will be sold off.

Essentially, this is a “scripted performance with actors adding their own drama.” Despite talk of a blockade, Iran’s Speaker of Parliament, Foreign Minister, and Central Bank Governor have all gone to Switzerland, indicating they are in urgent need of US dollars and economic recovery—a temporary blockade of the Strait is merely a bargaining chip for negotiation. By the evening, Trump may likely release some positive news from the negotiations (“claiming credit” for the Swiss talks) to support the market.

However, the focus of the US-Iran negotiations has shifted. Many are still watching the Iran nuclear deal, but what’s more important is Lebanon. Both the US and Iran have motives for a ceasefire, but the real issue lies between Israel and Hezbollah, neither of whom are willing to take the first step back. Over the coming weeks, the market might repeatedly experience such cycles of “ceasefire—conflict—Hormuz closure—negotiations—ceasefire—resumed conflict”; the news changes daily. What matters most is not whether Iran will truly block the Strait of Hormuz, but whether the Swiss talks can provide a “safety rope” for the Lebanon battlefield. As long as this rope holds, the Strait of Hormuz is more a card of deterrence than a bomb. But if the situation in Lebanon spirals out of control, today’s “crying wolf” fears could eventually turn real.

The real focus is—on Friday, the market increased the probability of the Federal Reserve raising rates, but both Chinese and US financial markets were closed for holidays and have yet to react. Next week’s releases of US June manufacturing and services PMIs and the May core PCE price index may either push rate hike expectations to extremes or confirm that current expectations are too aggressive.