Things you need to know
- Ceasefire announced at the 11th hour!
- Markets around the world are surging
- The Strait is OPEN and ships are passing thru.
- Bonds Up, Oil DOWN, Gold Up, VIX DOWN
- Try the Umbrian Style Mussels
Good morning! Look at this market! HELLO!!!! Get ready….it is RISK ON…..as expected – the world got an 11th hour deal…. they took it right to the edge…..teasing all day…. Investors, traders and even the algo’s struggling all day to figure it out…. The question? Will the bombs drop at 8 pm or not?
The late afternoon action yesterday gave us a hint that something was brewing…. because markets did not melt down, there wasn’t panic. Did the VIX rise? Yes, to a high of 28 (at 3 pm), but the telltale sign was how it collapsed in the last hour of trading…. Falling 8% off that high to end the day at 25.50 – still up 6% on the day, leaving us in ‘cautious mode’ but off that nervous high that looked like it was taking us to ‘panic mode’….
And stocks? They mostly ended the day higher! (another telltale sign). The Dow lost 85 pts, the S&P gained 5 pts, the Nasdaq gained 21 pts, the Russell gained 4 pts the Transports gained 242 pts or 1.3% (bingo!), the Equal Weight S&P lost 20 while the Mag 7 gave up 37 pts….a performance I’d call a ‘Win’.
Now if you read my note from yesterday, you knew how I felt…. I just didn’t see it, I was NOT in the camp that Trump was going to ‘obliterate a whole civilization’ – I mean come on, really? Were his words dramatic (and stupid)? Of course, but did you really expect anything different? Haven’t we seen him make bellicose statements before? It’s his style – maximum pressure and maximum drama.
At the end of yesterday’s note – I said.
“I am betting on an 11th hr. deal. No one, including the gulf states really wants to see total destruction of Iran – so let’s get real…..I say 6 pm….” (I think the news hit the tape closer to 6:30 pm!)
Early evening the news hits the tape……Trump agrees to a two-week ceasefire with Iran (negotiated by Pakistani Military Chief Munir and Prime Minister Sharif) – less than 2 hrs. before his deadline that threatened to ‘devastate a whole civilization….’ Negotiations to take place in Islamabad beginning Friday – although that is not confirmed ‘officially’.
Now this all hinges on at least one major tenet – Iran has to open the Strait of Hormuz – with no strings attached….and as of this morning – the Strait is officially opened, ships are passing thru but they must coordinate with Iran’s armed forces to navigate it.
Now, let’s be honest – this is only a first step, but it is a step and there is much more to come – but at 5 am – we can say the world is in a different place than it was yesterday afternoon.
And markets around the world are celebrating…..Asian markets were the first to react….and it was dramatic…. South Korea rose 6.8%, Japan up 5.4%, Taiwan up 4.6%, Hong Kong up 3.1%, China up 3.5% and Australia added 2.6%.
European markets are now fully engaged, and they too are up substantially – at 6 am France, Germany and the Euro Stoxx markets are up 4.3%, Italy up 3.3%, Spain up 3% while the UK is up 2.4%.
And as you expect – US futures are surging as well…Dow futures up 2.5%, S&P’s up 2.6%, Nasdaq up 3.8% while the Russell is up 3.7%.
Notice where you see the early strength…TECH and SMIDS are catching a bid as investors breathe a bit easier after the ceasefire headlines.
Tech had become oversold in the recent pullback, pushing valuations in many names back toward more attractive levels. Think ‘value’! So, the moment the geopolitical pressure eased — traders and algo’s stepped back in – looking for where the opportunity is as they scoop up some of those discounted names.
At the same time small- and mid-cap stocks are rallying, which makes sense. These companies tend to be more domestically focused and more sensitive to energy costs, so the pullback in oil and the reopening of the Strait of Hormuz is giving investors’ confidence to rotate back into that part of the market.
In other words — when the market flips and the tone is RISK ON, the VIX falls, so investors, traders and algo’s tend to buy beta first.
Understand what ‘beta’ is – is it how sensitive a stock is to the overall market.
If beta = 1 – then it moves as the market moves. Think of Industrials, Financials, Communications and Energy. If beta >1 then that means those names typically move MORE than the market (more volatile) in both directions. Think of Tech, Semi’s, Consumer Discretionary and SMIDs. If beta < 1 then it moves LESS than the market (less volatile) in both directions – essentially more defensive. Think Consumer Staples, Healthcare, Telecom and Utilities.
So, if you are ‘buying beta’ then you are typically buying Tech (all forms), SMIDS, cyclicals and other high growth names – because they would be expected to outperform under these circumstances.
I mean just look at what futures are doing…. The Nasdaq (tech) and the Russell (smids) are both up more than 3.5% while the market – defined by the S&P is up 2.5%.
As a long-term investor think of it this way – when the market goes RISK ON – leadership shifts from Beta = 1 sectors to Beta >1 sectors – which is exactly what we are seeing this morning in markets around the world. And clearly – when the market goes RISK OFF then leadership shifts from Beta >1 to Beta < 1 – capisce?
So, what is happening to OIL? It’s collapsing…WTI is down 15.6% this morning…trading at $95.30 while Brent is down 13% trading at $95. So now, the pressure at the pump should begin easing fairly quickly. Wholesale gasoline prices respond almost immediately, but retail stations usually take about a week or two to pass those savings through to consumers, another example of the classic “rockets and feathers” effect where prices rise fast but fall slowly. As these negotiations continue then we should expect oil to retreat even further – oil futures going out into the fall are pricing oil in the low $70’s but I suspect we could see that decline even further.
Now let’s talk bonds – I suspect we’ll see bonds being bought today…think lower oil prices reducing inflationary pressures which might mean lower interest rates and lower interest rates supports bond buying at these levels. This morning the 10-yr yield is down 5 bps at 4.24% while the 30 yr is yielding 4.84% down 3 bps and likely going lower.
Gold is another winner off the headline. It is up 1.7% today on top of yesterday’s 1.2% gain, trading this morning at $4,790 — up $82. And that might make you pause — because if global tensions are easing, shouldn’t gold be falling?
Yes… and no.
Yes — because easing geopolitical risk usually reduces the safe-haven demand for gold. Had the ceasefire not happened and tensions escalated further, gold would likely be surging even more as investors rushed into the classic safety trade.
But the market this morning is reacting to a different set of forces. The ceasefire and reopening of the Strait of Hormuz is causing oil to plunge, the dollar to weaken and inflation expectations to ease, which in turn is pushing bond yields lower. And when yields fall, the opportunity cost of owning gold declines, which tends to support prices.
So, while the geopolitical risk premium may be fading a bit, the macro backdrop of lower yields and a softer dollar is keeping gold well bid. In other words — if the bombs were falling, gold would be rallying as a safety trade. Today it’s rallying because interest rates are falling.
The VIX is plunging — down 20% as the news hits the tape. That move pushed the VIX through short-term trendline support at 22.30, leaving it sitting just above intermediate support at 19.60 — which brings us right back into the “calm or complacent zone.”
Now while that sounds like good news — and it is — don’t get too complacent. The situation remains fluid, and investors would be wise to stay focused and vigilant.
Economic data today includes Mortgage Applications and the release of the March FOMC minutes, which could offer additional clues about the Fed’s thinking on inflation and interest rates.
S&P closed Thursday at 6,616 — up 5 points, leaving us still below the long-term trendline at 6,644.
But that is about to change.
Futures are pointing 180 points higher in the pre-market, which sets the stage for the S&P to blow up and through that trendline on the opening bell. If that happens, we will also clear the short-term trendline at 6,771, leaving the index kissing the intermediate trendline near 6,804.
In total, the S&P would need to rally roughly 3% to break through all three trendlines — something that could easily happen in a risk-on environment… as long as the headlines don’t change. It’s going to be a good day!
Call me at 561-931-0190 and let’s talk about how Slatestone Wealth can help you reach your retirement goals.
Take good care,
Kp
[email protected]
Source: Bloomberg, CNBC, Reuters, Wall Street Journal
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Umbrian Style Mussels
Umbria is one of the 20 regions in Italy – bordered by Tuscany, Lazio and Marche and is the only region that is neither located along either coastline – Mediterranean or Adriatic or has a border with another country. It sits between Rome and Florence and counts Perugia as its capital. Umbria is known as ‘Il Cuore verde d’Italia’ or the green heart of Italy. It has spectacular landscapes and its fertile grounds come from the Valley of the Tiber. Be sure to include Perugia and the region of Umbria in your next visit to Italy. You won’t be disappointed.
This is an easy dish to make and should be served with toasted garlic bread, a big salad and a glass of chilled Rose – You can serve it as an appetizer or a main dish – However you like.
For this you need – 2 lbs. of fresh mussels…now if they are really fresh you will need to scrub them to remove any sand and make sure that you remove the ‘beard’. Once you clean them – strain and then set aside in a pot of cool water –
You will also need, olive oil, onion, garlic, dry white wine, ½ cup of diced sun-dried tomatoes in oil, red pepper flakes, fresh parsley and this preparation calls for diced sopressata as well. (Sopressata is an Italian dry salami that you can buy in any butcher of in a large grocery store – It is NOT pepperoni).
Begin by heating the oil in a large pot. Once the butter is all melted – add in the chopped garlic and diced onion – sauté for 5 mins…next add the diced sopressata and the diced sun-dried tomatoes. Sauté for another 5 mins. (Now add some red pepper flakes – if you want a little spice). (Some people will use pancetta instead of the sopressata – that’s ok – but the sopressata gives it a whole different flavor and texture.)
Next add in about 1 ½ cups of the wine – bring to a boil. Once it boils – add the mussels, cover the pot with a tight lid and reduce the heat to med hi and cook for about 5 – 8 mins. Remove the lid and stir the mussels a bit – cook for another 5 mins. Once done – check for any unopened mussels and discard.
Add in some chopped parsley – this adds color and finishes the dish.
While the mussels are cooking – make the garlic bread with slices of fresh Italian Pane di Casa bread…. Toast in the oven and then slice in half – Serve in a basket in the center of the table for your guests to enjoy. Have plenty of Rose wine to enjoy.
Delish –
Buon Appetito