By Molly Schwartz, cross-asset macro strategist at Rabobank
Markets laid in wait for war-related headlines yesterday after Trump truthed on Monday night that “negotiations with the Islamic Republic of Iran” were “proceeding nicely.” It’s also possible that “proceeding nicely” meant that the US was once again escalating to de-escalate, as hours later the US military confirmed reports of strikes against Iranian military assets, including speedboats which were laying mines in the Strait. While the news reel was sparsely populated, it did flag that the US Navy was restarting to guide ships through the Strait with a plan to help a dozen vessels through the passage in the coming days. However, minutes later a “US official” denied these claims, leaving traders, and vessels in the Strait, stranded. Brent crude oil climbed around $3.50 from open to $99.50/bbl.
A look at the current landscape suggests to us that a peace deal is far beyond the horizon. Rabobank’s global strategist, Michael Every, released a report, The Hormuz Odyssey: a new base case, which updates our base case to see complications in the Strait for around another three months. The possible outcomes of the war in Iran are immeasurable, but even in the pipe dream scenario where the war ends tomorrow, logistics are king. If a deal were to be magically achieved tomorrow, there are still somewhere around 1,500 ships still trapped in the Strait of Hormuz.
The Strait is incredibly narrow and it will take time for these ships to safely pass through. Energy strategists Joe DeLaura and Florence Schmit elaborate on the implications for energy prices in their recent report, Longer Stalemate, Higher Prices. Needless to say, they project oil staying higher for longer, forecasting Brent averaging around $120/bbl in Q3 of this year, which would imply a return to levels still not seen since 2022.
To further complicate the outlook, the proxy war in the Middle East between Israel and Hezbollah has also re-escalated, with the IDF reporting that it hit over 100 Hezbollah sites in Southern Lebanon, including “storage facilities, command centers, and observation points.” This, of course, likely puts another obstacle in the way of Trump’s insistence that GCC members join the Abraham Accords and normalize relations with Israel as part of a broader peace deal. While many of the GCC states are no friend to Hezbollah, the implications of normalizing relations with Israel during elevated hostilities in the Levant are a political nightmare.
US Secretary of State, Marco Rubio, hinted that in his view, negotiations to end the war may “take a few days,” which is certainly more optimistic than our view of a few months. Nuclear programs will continue to stand as a major barrier towards any sense of an agreement between the US and Iran. Total regime change in might not be in the cards, but achieving a firm commitment from Iran that it promises to table its plans for nuclear development is the only way the US can exit the war and keep some of its street cred.
But while nuclear proliferation is a major issue abroad, it may be presenting opportunities at home. The New York Times reports that the US government may allow private companies to use “Cold-War era plutonium from dismantled nuclear warheads” as fuel for nuclear power plants.
US Treasury yields traded mostly flat from the open, across the yield curve, with a slight bull-steepening bias, and the DXY index was little changed at 99.19. The US 5-year, 30-year spread widened again, back to 84bp, bouncing off of 1-year lows of 81bp on Friday. The US OIS curve remains positioned firmly in favor of hikes, pricing in around 70% of a hike by year-end, and a full hike by March of next year.
But the US consumer outlook remains grim. US Conference Board consumer confidence picked up a touch from 92.8 to 93.1, but remains firmly planted in negative territory. The components of the headline index—present situation and job outlook—have been trending consistently lower since 2021, while consumer expectations also remain in negative territory. While we should note that consumer confidence has been a poor indicator of economic performance for quite some time now, a poor consumer outlook coupled with a dire inflationary outlook could spell trouble for those at the lower end of the income spectrum. We will see headline and core PCE price data for April on Thursday, expected to register 3.8% y/y and 3.3% y/y, respectively.
Early yesterday morning, Russian foreign minister, Lavrov warned US citizens to evacuate Kyiv, ahead of military escalation in the region. The battle between Russia and Ukraine wages on, and so does that between the Russian Central Bank and Euroclear. Since the war in Ukraine and the ensuing sanctions on Russia, Euroclear has frozen Russian assets, with some EU players considering using said assets to help fund Ukraine. While that prospect remains tabled (for now), Russia is still trying to get its money back.
In the court of public opinion, views are mixed. But in the court of Russian law, the Russian courts have ruled decisively—in favor of Russia. The Moscow court of arbitration has ruled that Russia has incurred losses of approximately USD 250 billion after having been frozen by Euroclear, with the AP saying that “lawyers argued that Euroclear’s right to a fair trial was violated.” Euroclear, meanwhile, made its opinion on the Russian ruling abundantly clear: they do not care and Russian assets may be stranded in Belgium for the foreseeable future.