GeoMacro
| Cyclical Trends
Medium-term analysis of how elections, policy shifts, and conflicts move markets over the course of the cycle.
Equities have thrown caution to the wind for much of April and early May. We do not disagree with the sanguine mood, but caution that the Hormuz saga is far from over. Still, the AI capex mania continues and the labor market is firming in the US, suggesting that there is more upside to equities.
The tenuous ceasefire holds, with the "new geopolitical equilibrium scenario" remaining in place. Enough crude trickles through Hormuz to avert a global recession, but not to alleviate building inflationary pressures, a product of a complicated geomacro context that is not transitory. The Fed will look to ignore these in the short term, fueling the equity rally in the US. Chinese equities may pop thanks to the upcoming détente. When does it all end? Beware of major IPOs!
The Iran war is likely to re-escalate later this year even if shipping somehow resumes in the very near term — and yet an early reopening is looking less likely.
Peru is well established to elect a pro-market government in the June 7 run-off, with institutional constraints limiting left-tail policy risks. We will go long Peruvian assets when Hormuz volatility subsides.
The Iran war is deescalating further — against our expectations — setting up an aggressive return to the risk-on rally.
Markets may be underpricing a bifurcated political outcome. Unless the Iran deescalation succeeds, the delayed economic fallout from the energy shock could materially worsen Republican prospects and raise the probability of a Democratic Senate victory.
In this chartpack, we present the logic behind our sanguine view and why we think that oil has peaked. We also elucidate our three main scenarios from here on out.
As we publish this regularly scheduled GeoMacro Alpha Report, President Trump is warning of civilization-ending strikes against Iran. A bluff? Stage Five on the Seven Steps of Maximum Pressure? A real threat to use weapons of mass destruction? The odds and pattern of Trump's behavior are skewed towards the former, but even small odds of the latter make trading the next 24 hours dangerous.
Domestic politics suggest that President Trump needs to retreat from the war in Iran, but strategic factors suggest not. Stay defensive for now.