We have been immersed in what can now be cataloged like the Third Gulf War. Since the United States and Israel offensive against Iran began at the end of February, the world has faced the greatest disruption of energy supply of its history. We are talking about a crisis that has paralyzed 20% of the world’s crude oil, sequestering about 20 million barrels a day They cannot cross the Strait of Hormuz. Missile falls, drones setting fire to infrastructure and thousands of deaths in the region.
The impasse. Any basic economics textbook would dictate that financial markets should be in complete panic. However, the opposite occurs. It is enough for the White House to hint at a rapprochement or a vague ceasefire for the stock market to skyrocket, ignoring the physical fundamentals of a war in full swing. Wall Street lives in a parallel reality: the biggest oil crisis does not make them blink for a second.
A virtual collapse in the face of a real war. This same week, the markets experienced 48 hours of unprecedented volatility. As detailed oil priceoil prices fell sharply in the Asian session on Wednesday, falling more than 5%. Brent crude oil, the reference in Europe, pierced downwards the psychological barrier of $100, while the US WTI fell to $87.51.
The reason for this relief? According to the agency Reutersthe United States would have sent a 15-point peace proposal to Iran through intermediaries in Pakistan. US President Donald Trump boasted to the media that “productive” negotiations were moving toward a resolution. The screens of the traders were automatically dyed green: the European STOXX 600 index rose 1.2% and London’s FTSE 100 rose 1.1%. As Amelie Derambure explainedfrom the manager Amundi, the market simply launched itself to buy the idea of a relief rally (a surge of relief) at the possibility of a temporary ceasefire.
The bombs keep falling. However, there is no ceasefire; This should be clear. How to collect ReutersEbrahim Zolfaqari, spokesman for Iran’s joint military command, publicly addressed Trump on state television with these words: “Has the level of your internal struggle reached the stage of negotiating with yourself? We will never make a deal with you.”
At the same time, military reality contradicts stock market optimism. The Pentagon prepares the deployment of elements of the 82nd Airborne Division to the region, a drone attack just hit a fuel tank at Kuwait International Airport, and Israel is deeply skeptical of any concessions Washington might make to Tehran in the shadows.
Investors “bewitched” by the algorithm. To understand this disconnection you have to delve into the psychology of the market. An analysis published by FortunePaul Donovan, chief economist of UBSclaims that Wall Street is “spellbound” by the good news. “Markets do not react to information, they generally react to social media posts and headlines, even if they are fake news or contradictory,” says Donovan.
Investors suffer from a cocktail of loss aversion and confirmation bias. They desperately want the war to end, so they embrace any story that confirms that desire and ignore negative news. Added to this, the “TACO” phenomenon (Trump Always Chickens Outor “Trump always cows”), a belief rooted in the New York trading floor that the tenant of the White House will end up backing down from the economic pain of a prolonged conflict to protect financial stability.
Narrative as a weapon of war. Added to this is what energy expert Javier Blas defines in his column Bloomberg as jawboning (verbal intervention). The White House is winning the narrative battle in the markets without moving a single physical barrel. Trump’s constant messages in Social Truth promising a quick resolution—and even lifting sanctions on countries like Russia to flood the market—have managed to stop the panic. Blas sums it up perfectly: “Instead of being a sign of weakness, TACO is playing in Trump’s favor. No one knows for sure when or if he will try to end the war, which has been enough to prevent the traders skyrocket the price of oil.”
The desperation to cling to any positive headline is such that it generates episodes of extreme volatility and information chaos. He Financial Times reported in his coverage how crude oil suffered wild fluctuations (Brent fell 11% to rebound shortly after) after a tweet by the US Secretary of Energy, Chris Wright, stating that the Navy was already escorting oil tankers through Hormuz. The message was deleted minutes later and denied by the White House itself, but the effect on the algorithms had already occurred.
The bath of physical reality. While Wall Street plays a game of guessing the next tweets from the Oval Office, the physical reality of oil is stubborn. A report from Bloomberg puts his finger on the sore: The physical market continues to deal with shortages, and the war has demonstrated the absolute control that Iran exercises over the Strait of Hormuz. Although Tehran informed the International Maritime Organization that “non-hostile” ships can transit, the route remains effectively closed and reports circulate about the presence of dozens of naval mines Iranians in the area.
The mathematics of disaster, detailed by Reutersthey are chilling. After 25 days of conflict, the world has stopped receiving 500 million barrels (the equivalent of five full days of global supply). The logistical desperation is such that Saudi Arabia has boosted its exports from the port of Yanbu, on the Red Sea, to avoid Hormuz. To compound the crisis, Russia has suspended cargoes at its Baltic ports following a vicious Ukrainian drone attack, adding more uncertainty to the global market.
Larry Fink, CEO of the management company BlackRocksummed it up bluntly in statements to the BBC: “If Iran continues to be a threat to Hormuz and oil settles between $100 and $150 per barrel, we will have a global recession.”
Collateral damage. The narrative chaos has even reached gold, which has lost their protection status. According to Financial Timesthe price of the precious metal has plummeted 16% since the start of the bombings, erasing its gains for the year. It is not optimism; It is survival. Financial institutions are liquidating their gold positions to cover margin calls (margin calls) caused by their massive losses in other assets. Furthermore, the prospects for high energy-driven inflation suggest that central banks will keep interest rates high, making gold less attractive.
On the other hand, the sovereign bond market reflects the underlying tension that the stock market prefers to ignore. Robert Armstrong, columnist from the newsletter Unhedged of the Finance Timesexplains that long-term bond yields are rising significantly because the “term premium” is increasing. Investors fear the supply shock will raise inflation and slow growth at the same time. In fact, officials from the United Kingdom’s Office for Budget Responsibility have already warned that British inflation could soar to 3% if oil prices stagnate at current levels.
The physical hourglass. The world’s stock markets celebrate temporary falls in the price of crude oil based on the hope emanating from Washington. But verbal intervention has an expiration date. As Javier Blas warns in Bloomberg: “Sooner or later, the president’s messages will stop working.”
If the war continues and a real ceasefire is not reached in the coming weeks, the physical shortage of oil that is already looming in Asia will inevitably spread to Europe and America. Speeches can calm the algorithms and disguise quotes for a while, but when the refinery tanks remain empty and the ships still do not cross Hormuz, reality will hit head-on. Wall Street can afford to ignore the missiles by closing its eyes for a moment; but the world economy does not move with tweets, it moves with barrels of oil. And those, for now, remain anchored in the Gulf.
Image | freepik
GIPHY App Key not set. Please check settings