Unbelievable
Noug Dolan
And what a difference a few hours can make: The President’s “a whole civilization will die tonight, never to be brought back again,” as the vice president campaigned in Budapest for Viktor Orban - to “I agree to suspend the bombing and attack of Iran for a period of two weeks…
We received a 10-point proposal from Iran, and believe it is a workable basis on which to negotiate.
Almost all of the various points of past contention have been agreed to between the United States and Iran, but a two-week period will allow the Agreement to be finalized and consummated…
It is an Honor to have this Longterm problem close to resolution.”
Trading Tuesday afternoon to $117.63, WTI (July futures) almost touched $95 early in Wednesday’s session (“biggest drop since 2020”).
The S&P500 gapped 2.7% higher at Wednesday’s open, with the Nasdaq100 and small cap Russell 2000 gapping 3.5%.
The MAG7 Index surged 4.2%.
Financial stocks were even stronger.
The KBW Bank Index gapped up 4.4% and the Broker/Dealers 4.5%.
After trading at 28 during Tuesday’s session, the VIX (equities volatility) Index sank to 21 at Wednesday’s open.
European stock market moves were even more dramatic.
Germany’s DAX Index gapped 5.0% higher, with France’s CAC40 jumping 4.3%.
Italy’s MIB and Spain’s IBEX indices gapped 4.2% and 4.1%.
UK FTSE 100 Index opened 3.0% higher.
European banks (STOXX 600) gapped up 6.0%, ending the week 6.5% higher.
European (subordinated) Bank CDS sank from 125 to 108 bps.
European bond moves were just as dramatic.
After trading to 4.00% in Tuesday trading, Italian 10-year yields opened Wednesday trading 39 bps lower at 3.61%.
Greek yields sank from 3.93% all the way down to 3.59%.
France’s 10-year yield was at 3.80% on Tuesday, only to sink to Wednesday’s 3.51% low.
German yields dropped from 3.09% to 2.90%.
UK gilt yields sank 26 bps to 4.68%.
Acute volatility across asset markets was a global phenomenon.
Japan’s Nikkei spiked 4.8% at Wednesday’s open.
For South Korea’s KOSPI Index, it was a 6.0% gap open.
Taiwan’s TAIEX saw 4.0% - and 3.0% for Australia’s ASX200.
The iShares emerging equities ETF (EEM) gapped 6.4% higher at Wednesday’s open, before ending the session with a 5.5% gain – the biggest one-day advance since the President’s tariff pause (April 9, 2025).
EM CDS sank 18 Wednesday (to 165bps), also the largest one-day decline since the “pause.”
The 1.2% rise in the iShares EM bond ETF (EMB) was the largest post-“pause” gain.
For the week, the Mexican peso gained 3.5%, the South African rand 3.4%, and the Brazilian real 3.0%.
Asian bond markets were unstable.
Japan’s 10-year JGB yield traded to 2.43% on Tuesday, falling to 2.34% on Wednesday - only to close the week back at 2.43% (the high back to 1999).
Australian yields were at 5.01% Tuesday, fell to 4.86%, and then ended the week at 4.97%.
Ten-year Treasury yields traded Tuesday at a high of 4.38%, then dropped 15 bps to a Tuesday low of 4.23% - with yields then rising to end the week at 4.32%.
It was an even wilder ride for benchmark MBS.
After trading to 5.40% Tuesday, yields were down to 5.16% at Wednesday’s lows – before ending the week at 5.26%.
This week saw important Bubble Dynamics at play.
With war raging and a global energy crisis taking hold, hedging global market exposures has been a rational course of action.
And with the President’s threats risking uncontrollable war escalation, there was every reason to hedge some exposure going into Trump’s Tuesday evening deadline.
Preposterous madman threats of “bombing back to the stone age” and “a whole civilization will die” raised the possibility of absolute chaos.
Would a last-minute deal materialize, or might all hell break loose?
Not only did the circumstance create extraordinary binary market risk, but this event would also transpire outside of U.S. market hours.
Prices for enormous quantities of options and derivative hedges hung in the balance.
More specifically, those that had written options and derivatives would not enjoy the luxury of liquid and continuous markets necessary to dynamically hedge potentially momentous market-moving developments.
Depending on the binary outcome, risk markets would gap either higher or lower.
With risk premiums highly elevated going into Tuesday evening’s deadline, there was clear potential for a pricing collapse in bearish options and hedges in the event of a deal.
But a no deal “back to the stone ages” scenario had potential to unleash market chaos.
Energy assets throughout the Gulf would have been vulnerable to Iranian attack and the Strait of Hormuz becoming a literal mine field.
This risked disastrous dislocations in global energy prices and supplies.
A major gap lower in global equities and bond prices risked financial market panic, as sellers of puts and bearish derivative hedges would rush to “delta hedge” (sell securities/derivatives) their rapidly ballooning exposures.
This is where Trump and Fed “puts” play a momentous yet surreptitious role throughout the markets and contemporary finance more generally.
Such a major event, like Tuesday evening’s war deadline, poses acute market dislocation risk.
With enormous amounts of market risk hedges overhanging the markets, a bad outcome would unleash massive sell programs, market discontinuity, panic, and unwieldy self-reinforcing liquidations.
A market crash scenario is a rational fear.
It's important to recognize that the further a Bubble inflates, the greater the systemic risks associated with the proliferation of hedging strategies.
A marketplace simply can’t hedge itself.
Popular strategies of hedging with options and derivatives only transfer risk to players with little wherewithal to make good on hedges in the event of a major market drop.
Instead, these derivatives operators rely on strategies where timely shorting/selling establishes positions that are to generate the required cash flows to pay on hedges they’ve previously sold/written.
The more market prices inflate, the greater the risk that popular hedging strategies at some point overwhelm marketplace liquidity.
Throw in the potential for a run on Trillions of perceived liquid ETF shares (in the event of a market panic) – and a market crash scenario becomes a serious issue.
There is, however, virtually no concern for a crash today.
The S&P500 and Nasdaq100 were little changed in Tuesday trading, ahead of the evening deadline and associated extraordinary binary market risk.
Indeed, the S&P500 closed the week only about 2% below record highs.
Markets can approach the edge of the cliff, yet confidence holds that President Trump knows precisely where and when retreat is necessary to avoid an accident.
Derivative players can comfortably sell risk “insurance,” confident that the problematic downside dislocation scenario is something policymakers will not allow to unfold.
And knowing binary event odds are significantly skewed in favor of bullish outcomes, the hedge fund community and speculators will invariably focus on the likelihood of gap higher scenarios.
As we witnessed again on Wednesday, the risk vs. reward calculus still strongly favors short squeezes and the forced unwind of hedges.
Myriad hedging strategies do not these days function as models would predict.
As noted above, impacts from this extraordinary backdrop flow beyond distorted markets to “contemporary finance more generally.”
High yield CDS prices collapsed 60 bps over the past nine sessions, sinking back down to 346 bps – incredibly 30 bps below the five-year average of 376 bps.
Sellers of “insurance” win again at the expense of buyers.
Market perceptions of the sanctity of Trump/Fed “puts” significantly skew pricing for “insurance” against defaults in risky Credit.
Presuming Washington controls the weather, enterprising derivative operators have been conditioned to sell “flood insurance”.
Importantly, inexpensive and readily available “insurance” fosters high-risk lending and Credit Availability more generally.
This powerful dynamic is instrumental in sustaining high-risk lending, despite festering “private Credit” issues and escalating systemic Credit vulnerability.
It's a fundamental tenet of Credit Bubble Analysis that Bubble Dynamics be recognized and mitigated as early as possible.
As we’ve witnessed for years, protracted Bubbles reach a point where further inflation stokes an exponential rise in systemic risk.
The danger of pricking Bubbles becomes too great a burden for policymakers to shoulder.
Indeed, in the Bubble’s perilous “terminal phase,” every effort is made to indefinitely hold Bubble deflation at bay.
The aged “global government finance Bubble” has reached uncharted waters.
Many will think this is a stretch (at a minimum).
But I see inflationism as having left its mark at every turn.
It might be too much to blame central bank monetization and contemporary unfettered “Wall Street finance” for all the world’s problems, though it’s a reasonable place to start.
The world would certainly look so different today had the scourge of inflationism not prevailed over recent decades.
Acute market instability, including Wednesday’s gap opening, epitomizes well-entrenched monetary disorder.
Moreover, the Trump/MAGA populist movement can be traced back to decades of inflation-induced economic and financial instability, wealth inequality, insecurity, distrust of national institutions, and social/political disorder.
And if not for over-liquefied and over-tolerant speculative markets, I doubt Trump risks aggressive “liberation day” tariff regime implementation.
And I’ll go one step further.
Tariffs have created unprecedented power in the hands of President Trump.
He can, at a whim, threaten and punish.
As easily, Trump can reward and enrich.
Of course, such power is intoxicating and addictive.
And how can such power not create an insatiable appetite for ever greater exploits?
But it’s a different world – and Trump administration – if a normally-functioning bond market would revolt against perpetual deficits of 6 to 7% of GDP.
In today’s bizarro Bubble world, there’s endless “money” for guns and butter aplenty – and throw in an historic AI arms race for good measure.
“Money” literally for anything and everything.
Of course, President Trump yearns for an extra $500 billion to ensure ongoing military supremacy for his quest of greater intimidation, threats and historic conquests.
My point: I don’t see Trump initiating war against Iran if Washington faced traditional fiscal restraints.
Deficits are already egregious – and this war and replenishment of our depleted munitions will be costly.
Normal markets would be kicking the administration’s ass – and we can assume the President would behave accordingly.
Instead, it’s halcyon days of a 4.32% 10-year yield and stocks near record highs - markets all too content to accommodate.
The President is unhinged and feeling invincible – a combo that beckons for speculation around Trump “put” and unfailing TACO.
He'll push things to the precipice - and then mount a hasty retreat.
Buy the dip and squeeze the shorts!
While on my analytical tangents, I’ll offer another thought.
Market Bubbles have inflated to the point of no return.
Securities markets have come to dominate everything – here in the U.S., it’s the economy, society, politics, and even national security.
When the Trump administration was negotiating tariffs with China, a faltering stock market would have provided the Chinese added leverage.
We undoubtedly have the strongest military in history.
But the badly outgunned Iranians gain major leverage if their asymmetric warfare puts U.S. stock and bond market Bubbles at risk.
I have no expectations that markets behave normally during war – trade or military.
And with midterms less than seven months away, the administration will undoubtedly pull out all the pro-Bubble stops.
The Islamabad talks should be fascinating.
Hopefully, as the President claims, the Iranians are more reasonable in private than they have been in public.
The President is back to the old “no cards” banter his administration proclaimed prior to Chinese rare earth restrictions and fraught trade negotiations.
It’s Unbelievable how much leverage the Iranians still possess coming into these talks.
President Trump is clearly eager for an exit.
Renowned tough and patient negotiators, it’s difficult to believe Iran will easily relinquish control over the Strait of Hormuz.
Trump said Friday evening the Strait would be “open fairly soon.”
With global energy supplies running short, time is on Iran’s side.
They are also well-aware of the ticking U.S. political clock.
I can’t help but think of President Trump’s asymmetric warfare use of tariffs.
He shattered rules and norms, establishing a unique capacity to punish, reward and profit.
It’s like when Bernanke started printing money, fatefully unleashing printing presses around the globe.
We should expect others to advance their own “asymmetric warfare,” certainly including the Iranians.
Even if negotiations result in a commitment to open the Strait of Hormuz (seemingly a big “if”), Iran’s determination to control and profit from traffic flow is more than a fleeting interest.
It’s a changed Gulf. And while it will take years for Iran to rebuild, the regime will surely start by swiftly replenishing their capacity to menace the Strait and Gulf energy assets.
More than ever before, they are keenly aware of pressure points.
Moreover, the regime surely views previous restraint as a disastrous strategy.
President Trump wants to claim victory - like never seen before - and be done with it.
It may prove anything but easy to walk away.
Meanwhile, Credit problems fester away…
April 9 – Bloomberg (Neil Callanan, Weihua Li and Jinshan Hong):
“The software problem roiling private markets is about to face a big new test.
A wall of debt maturities is looming for the industry just as artificial intelligence threatens to upend entire businesses in what’s been dubbed the SaaSpocalypse.
More than $330 billion of high yield, leveraged loan and business development company-linked software and technology debt is coming due for repayment through 2028, a chunk of it tied to firms owned by private markets.
As companies look to refinance in the coming months, they face numerous headwinds, from fears about AI devaluing or replacing their products to the risk of higher borrowing costs spurred by the war in the Middle East…
‘Software borrowers from private-credit funds are more highly leveraged and more dependent on future growth expectations than borrowers in other industries, making them more sensitive to adverse shocks,’ according to… MSCI Inc.”
April 10 – Wall Street Journal (Heather Gillers):
“Most insurance companies got through the 2008-09 financial crisis all right.
A ratings firm just warned that the industry might not get through the next one unscathed.
A.M. Best published a report Friday that finds that the investment portfolios of insurers that sell annuities hold more risky debt than they did in 2007, the year before the worst downturn since the Great Depression.
The ratings firm adds that annuity portfolios had a slightly smaller financial cushion in 2024… than they did in 2007.
Annuity portfolios also held more investments that had been sold by companies with which they shared some affiliation...
‘We’re significantly worse off,’ said Erik Miller, A.M. Best senior director.
‘The chance of not being able to pay your claims is just higher.’
The study looked specifically at the reserves insurers set aside to make payments on annuities, the savings vehicles that promise guaranteed income in retirement.”
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