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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
I am belatedly reading a book at the moment called The Subtle Art of Not Giving A F*ck (the asterisk is the choice of the book publisher). I’m only about halfway through, but the gist is that there’s value in embracing adversity, picking your battles and just not expecting the world to make you happy. Find fulfilment in the things you can control and that are important to you. Care less.
I mention this not because I’ve turned my hand to self-help columns, or because I take a weird pride in reading popular non-fiction books a decade after they are released, but because it really feels like financial markets have internalised this message.
The past seven weeks have been a huge stress test of investors’ nerves. Energy price inflation has jumped by the biggest margin in a quarter of a century, according to the number-crunchers at UBS, and there’s every chance it could get much worse. In many parts of the world, it already has. The IMF says the global economy will slow to a Covid pace if we carry on like this. Nato is in peril. Geopolitics are a mess. Governments pretty much everywhere have to find the money for defence, and quickly.
Flare-ups of violence in the Middle East are, of course, nothing new. But each time they have happened in recent years, financial market reactions have been limited because investors have consoled themselves with the fact that they have not become wider conflagrations or borked the Strait of Hormuz. Well, now we’ve had that wider conflagration, and your blockade of the strait, and typically risk-sensitive markets like stocks have, after a dip, pushed higher regardless. Further progress towards a full reopening of the strait, while fragile and no quick fix, have added further fuel to the good vibes.
It could take weeks or months to get back to normal, but investors have decided, somehow, that doesn’t really matter after all. Just the fact that negotiations of some kind are happening, heading in the vague and meandering direction of a proper ceasefire, is enough to rekindle the market enthusiasm that was damped at the hottest point of the Iranian conflict in March.
Oil prices are still hovering a little under $100 a barrel, 45 per cent above where they started the year. But US stocks have wiped out the knock they suffered last month, when measured through the benchmark S&P 500 index, and indeed have cracked yet another new record high. Government bond yields, and therefore borrowing costs for the world, are higher than they were six weeks ago, but they are steady. The dollar, which put on a pretty feeble impression of a haven asset in the noisiest part of the war on Iran, is backing down. Gold bugs are rediscovering their speculative zeal.
Companies are buying other companies at pace and are still spending on innovation and expansion. The conversation around AI has shifted, in the words of Andrew Sheets at Morgan Stanley, from “what if it fails?” to “what if it works?” All in all, it “smells like animal spirits”, he says.
True to their miserabilist caricature, bond investors appear a little more sensitive to headlines from Iran than their cousins in stocks. As Jim Reid at Deutsche Bank points out, stocks “are breaking the shackles” from oil prices, “while bonds have traded pretty much in lockstep”. Government bonds have stabilised, but they have not recovered from the March wobble by anything like the same degree. But arguably that’s because bonds started in the wrong place, pumped up by worries over AI and the US economy that are now fading from view.
Maybe we can live with oil trading at 100 bucks and a disintegration of the global defence order after all? The market value of Nato stability appears to be pretty much zero. Even if you anticipated a bright year for risky assets, this is really something to behold.
What to make of all this? Matt King at Satori Insights reckons investors are “war weary” and that “markets just wish it was all over”. This is true. But he also makes another good point, which is that the consensus among analysts on corporate earnings has barely shifted and is, indeed, still growing. Earnings season in the US is in its early stages, but it is pumping out good numbers. And unless the war in Iran really rumbles company performance, it will not rumble stocks. It is, he says, “amazing how well risk has stood up”.
The reliably upbeat multi-asset strategy team at HSBC sums up the good vibes nicely. “‘Less bad’ is good enough,” it said in a note this week. “We suspect calls for investor complacency will be abundant in the coming weeks.”
But, they added, it is the rate of change that matters. “We don’t need a full return to normality” to unwind the nervy market moves of the past six weeks, they said.
It does not take a genius to see how this could backfire. Sunny markets encourage the Trump administration to keep on pushing at the limits of what geopolitics and financial markets can tolerate, which raises the risk of accidents.
But without something to break the spell, like another large leg higher in oil prices that tips the US economy into recession, or misplaced massive interest rate rises from skittish central banks spooked by inflation risks, it is hard to fight the market. Care less, and go with the flow.
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