Mid-week market update: I wrote on the weekend that the Trump Administration was on the verge of a TACO (Trump Always Chickens Out) pivot. The market had the hint of a TACO on March 9, when he told CBS: “I think the war is very complete, pretty much”, but changed his tune hours later: “we’ve already won in many ways, but we haven’t won enough.”
The TACO is being made. Here is why. Today is the second consecutive day that nationwide average gasoline prices are above $3.50 a gallon.
During past trade disputes, the TACO was accomplished with a simple Trump pivot because the opposing party was open to the pivot. This time, other belligerents in the conflict have other ideas, namely Iran and Israel.
Trading on Headlines
I have said that the main objective of the Iranian leadership is survival. After 10 days of bombing, the regime has shown a high degree of resilience and they have apparently accomplished that task. It seems that they are now trying to assert their newfound “victory” by asserting dominance over the region by threating other Gulf states.
By contrast, an
article published the Economist tells the story of Israeli reticence: “America’s war aims may be diverging from Israel’s”. Israel is seeking full regime change, while Trump is more reticent. The objectives of the two allies in the conflict are starting to diverge.
As a consequence, the market is trading on headlines abd focusing on the oil price action. News stories about shipping attacks in the Strait of Hormuz, its mining, and possible SPR release are examples of headline induced volatility. The accompanying chart tells the story of how oil prices expectations have evolved. The main energy equity ETF (XLE), which is heavily weighted in Exxon and Chevron, peaked soon after the bombing began, while Brent prices continued to rise. By contrast, The oil services ETF (OIH) peaked on February 24, well before the conflict began.
I interpret these conditions as market expectatons of a short war. Emergy stocks are not tracking the rise in the front-month headline oil price, indicating that investors don’t believe that the surge in oil prices are sustainable. This is confirmed by the falling OIH to XLE ratio. A falling ratio is a signal that the market doesn’t expect a ramp in oil & gas capex consistent with the performance of oil majors, which is another indication that the surge in oil prices are fleeting.
Tracking the TACO
In the meantime, the conditions for a Trump TACO remain in play. The combination of elevated equity and bond market volatility, rising bond yields, and weak stock prices are all pressuring a TACO pivot.
Consider, for example, Trump’s response to the news that Iran a handful of naval mines in the Strait of Hormuz. He demanded that they be removed and threatened retribution. But, “if…they remove what may have been placed, it will be a giant step in the right direction” [emphasis added]. That’s a signal that he is seeking an off-ramp.
Tactically, I am monitoring the evolution of the major U.S. indices, which traced out a contstructive panic bottom outside day reversals (in red) on Monday. The next task for the bulls is to rally above the dotted falling trend lines.
The silver lining is the NASDAQ 100 against the backdrop of a weak tape. Even as the index tests the falling trend line, the percentage bullish on P&F is tracing out a positive divergence, indicating that large-cap growth could become the renewed leadership if the bulls seize control of the tape.
