A Pause To Negotiate A Deal? Some Caveats...

Authored by Peter Tchir via Academy Securities,

Basically we wound up at the better end of our “base case” in yesterday’s Spaghetti Western, and you could argue we made it all the way into our best case of “ceasefire” (I’m reluctant to label it that, as you will see, but it is touching on that end).

I do think we are far from a “real deal”.

In any case, markets are responding according as both sides send people to Pakistan to negotiate a deal.

Stocks are up strongly across the globe, with Europe and Asia leading the way (they were hit hardest by the conflict). 

Bonds too are having an incredibly strong day (once again led by Europe).

Crude oil is falling like a rock, as shipping is potentially set to resume.

One reason stocks didn’t seem to respond much last week to rising spot oil prices was because later month contracts hadn’t risen much.

For now, the August WTI contract is basically where we were on March 23rd, the Monday that began the “deal is on the way” theater, which will temper how much further the stock market can rally.

Any “Ceasefire” Should Benefit the U.S. the Most

While we don’t know the specific status of each country, it seems fair to argue that the U.S. can do more to bolster its position – politically and military, than Iran can during a pause. A win for the U.S. and markets.

It will be interesting to see what develops on the “coalition” side of the equation. There has been reporting/wild speculation (difficult to tell the difference sometimes) that China was involved in bringing Iran to the deal. That could be interesting if true, and if China really wants to play a role.

Some “Caveats”

I suspect that how markets and voters respond, will influence what comes next. Two things show up as “immediate” question marks around the negotiations:

• The U.S. acceptance is “subject to” Iran opening the Strait. Iran has agreed to control shipping through the Strait. Both sides are “vague” enough that this could be acceptable enough to keep the negotiations going. Though it is pretty clear, that the first “walk away” moment, is likely to come from either side regarding how open the Strait really is.

• Vance (who will be leading the U.S. team) has already brought up the need for Iran to “negotiate in good faith”. Since the conflict started while “technical negotiations” were ongoing, this is another signal that the U.S. needs progress.

• The “Supreme Leader” who until last night, allegedly sending slips of paper with instructions to runners to deal with the negotiations, had been largely MIA (with many reporting severe wounds and questions about his power).

• Israel reportedly has agreed to cease attacks as well. Israel is largely aligned with the U.S. and largely dependent on U.S. forces in the region, but largely is not the same as totally.

These are just some of the things that could cause some breakdown in talks.

Everyone’s a Winner…

Both Iran and the U.S. are claiming this to be a major victory.

While it is all evolving rapidly, the U.S. has a multipoint plan. Iran has a multipoint plan.

 Very few of the points align.

Clearly this is why they are sitting down at the table.

Both sides have clearly read the “Art of the Deal” and are approaching negotiations from a maximalist point of view.

How serious either side is on each of their points remains to be seen. Given where we were yesterday morning, it would seem that the U.S. is likely to be the first to use the threat of ending the ceasefire to get maximum leverage.

Just this morning, the President announced “working with Iran” to dig up the nuclear materials. That seems like progress as ensuring Iran cannot attain nuclear weapons should be a key goal of the administration (and the world).

Bottom Line

This played out at the “optimistic” end of our spectrum of outcomes. A very pleasant surprise.

From here the devil (almost literally) will be in the details. I don’t expect smooth sailing, but market reaction will be muted in either direction, but especially to the downside, now that both sides seem willing to play ball. Though who wouldn’t play ball when you think your demands might be met, for a one-sided victory?

I do think public reaction, domestically, will influence how tough the U.S. negotiates versus trying to declare victory and move on.

Hopefully we see significant transit through the Strait.

On the negative side of things (there always has to be a negative), it is unclear how much damage has already been done to the global economy and supply chain, and how quickly that can be rectified (especially if traffic is limited).

Now we can get back to affordability (which got better with the pause, but is still an issue), private credit, etc.

Lot of comparisons to the post Liberation Day, TACO, rally. That just doesn’t seem correct.

Stocks were never in freefall like they were then.

We have not moved too far from the highs on many major indices. So, yes, the rally overnight can continue, but the comparisons to post Liberation Day, tariff walkback, rally isn’t realistic.

Good luck and am glad we aren’t waking up to the smoking rubble of a society (which never seemed likely but was in the back of everyone’s mind).