"Green-Dot Sunday" Is Non-Negotiable: Oil Up, Stocks Down As War Begins 2nd Month
Why it matters: The war's second month brings stagflation fears, with oil up and stocks down, impacting global energy supply and market stability.
- Markets are transitioning from pricing inflation risk to weighing a demand-shock-driven growth scare, leading to bonds rallying in the face of higher oil and lower stocks (stagflation).
- Goldman Sachs' Shreeti Kapa notes that the market's trajectory hinges on the duration of the war and the safe transit of oil vessels through the Strait of Hormuz.
- Iran reported attacks on electricity facilities in Tehran, while the IDF stated it was striking Iranian targets across Tehran, indicating escalating conflict.
- Regional foreign ministers are meeting in Pakistan to seek peace and an off-ramp, even as a report suggests the Pentagon has been preparing ground operations with Marines arriving in the region (WaPo).
- CTAs have sold even more global equities, approaching max short levels, while Main Street is showing panic, according to Brian Garrett.
- SPX Call Skew is collapsing, reflecting diminishing hope for a quick market rebound, and SPX realized correlation remains extremely low for the size of this drawdown.
As the war enters its second month, markets are shifting from pricing inflation risk to a demand-shock-driven growth scare, with oil prices rising and stocks falling, a situation Goldman Sachs attributes to the war's duration and the safety of oil transit through the Strait of Hormuz. Despite multiple de-escalation attempts, the conflict intensified over the weekend with reported attacks on electricity facilities in Tehran and IDF strikes across the city, further complicating an already fluid situation. Market participants, including Goldman's Brian Garrett, are experiencing "headline fatigue" and a diminishing hope for a quick rebound, as evidenced by collapsing SPX Call Skew and continued equity selling by CTAs.
