Iran

A key risk to our view has materialized. Our base case remains constructive, but risks have increased. Upgrade Tail Risk Strategies from overweight to max overweight. Upgrade Canadian equities and the Canadian dollar to overweight. Upgrade Australian equities and the Australian dollar to overweight.

Clients are universally asking us when we expect President Trump to activate the legendary “Trump Put.” We believe that the S&P 500 would have to correct by more than 10% to practically guarantee a put. We are open minded that it could occur before; it could also occur later. But a double-digit stock price decline will certainly be a greater motivator. 

An energy price spike caused by a Middle Eastern war almost guarantees that Republicans will lose control of the House, and the chance of a Democratic Senate victory increases from 35% to 40%.

In the short term, there is plenty to be worried about in macro beyond the Middle East. The market was on thin ice before the Iran conflict. In the long term, the base case scenario remains bullish, but the war in the Middle East needs to be brief.

The war in Iran is disrupting global oil and LNG flows and remains a threat to regional energy infrastructure. 

Energy price risks remain skewed to the upside over the near term.

It is too soon to sell the rip in oil or buy the dip in stocks. Stick with risk-off trades for now.

Middle East hostilities have triggered risk-off moves and pushed oil prices higher. Previous geopolitically driven oil price disruptions suggest that speed, persistence and equity market vulnerability relate to the degree of the market sell off. At the other end of the spectrum, energy stocks should benefit, but have already rallied significantly.

Since our Saturday missive, there have been several developments in the ongoing conflict between Iran and the US-Israel coalition. 

The fog of war is the thickest at the dawn of kinetic action. However, BCA’s GeoMacro Strategy has trade recommendations to manage and thus we send this missive despite the significant uncertainty.