US stocks slide as chance of Trump TACO wanes

The US stock market opened lower on Thursday as the market digested the growing odds that the war with Iran will escalate rather than find an off-ramp. This was always the case, but investors were momentarily made optimistic by President Trump’s insistence earlier in the week that his negotiations would soon bring an end to the war, now in its fourth week. The bet this week was that the impending economic fallout from the war would make Trump perform another TACO (Trump Always Chickens Out) reversal that would benefit stock prices.

On Wednesday, Iran confirmed that no negotiations had taken place despite Trump’s statements and that it did not take the administration’s 15-point ceasefire deal seriously.

Oil in the US rose nearly 4% to close in on $94 after sinking below $90 earlier in the week. The US Treasury curve saw yields rise from 12-month to 30-year tenures.

Trump looks for ‘final blow’ in Iran war

Despite Trump’s public search for an off-ramp in the Iran war, US media has focused on the US military moving thousands of airborne and ground troops to the theater. The rumor that the US will launch a major offensive after markets close on Friday is picking up steam.

Adding to the nervous attitude is a report in Axios that senior US officials are planning a “final blow” that would involve increased bombing and attempts to overtake several islands in the Persian Gulf in a bid to reopen the Strait of Hormuz. These include Kharg, Abu Musa and Lakan islands, territory that is either a port of Iran’s oil export infrastructure or strategic footholds in its control over the Strait.

The upside for traders is that any escalation in the war will likely be met by further Iranian missile strikes on key Gulf Arab oil fields and infrastructure. And a US takeover of Kharg island would mean yet another reduction in global oil supplies.

Peter Boockvar, chief investment officer at Bleakley Financial Group, told CNBC announcers on Wednesday that $80 is the new baseline for oil prices even if the war ends.

“The new price of oil post the end of this is going to be more like $80, not $65, with still risk to the upside,” Boockvar said, pointing to heavier demand due to a host of nations seeking to build up more extensive reserves, as well as producers in the Gulf dealing with destroyed infrastructure.

S&P 500 still up on week

The S&P 500 has started Thursday morning trading down between 0.4% and 0.9%. If it can hold onto its present 1% weekly gain through Friday, this would be the first week that the index registers a positive move since the war was launched by Israel and the US on February 28.

The 6,550 level is a key support level. While it was broken through last week, buyers have been keen to buy up and dips below it this week. However, another break below that level will have traders expecting a move toward last summer’s supports at 6,360 and 6,200.

On Tuesday, Wells Fargo said that even with a cessation to the war, the S&P 500 would have difficulty overtaking 7,000 in the near term. The analysts argued that the 7,000 level should remain firm resistance until the Fed signals once again that it’s open to rate cuts. At its meeting last week, the central bank governors signaled that rates would remain unchanged for the foreseeable future as the higher Oil prices caused by the war could reignite inflation.

As the index is now trading below the 200-day Simple Moving Average (SMA), expect the share of traders who are already negative on the index’s prospects to grow steadily. A true narrative switch for the war and for Oil prices is required for any meaningful upside.