The trading week started with a mixed narrative. On the one hand, the failure of US-Iran peace talks in Islamabad put pressure on the commodity market, but on the other, the technology sector continued to be a pillar of stock market strength. President Trump's sudden cancellation of the special envoy showed how fragile the current diplomacy is, but Iran's proposal to open the Strait of Hormuz without touching on the nuclear issue is seen as a pragmatic step to avoid a deeper global economic recession.
The world is now facing the reality of very tight energy supplies. Goldman Sachs' forecast of a 12 million barrel per day inventory draw in April is a frightening figure for energy importing countries. The delay in normalizing exports until the end of June means that Brent oil prices above $100 may become the "new norm" for a longer period. This creates the risk of "demand destruction" where excessively high prices will eventually force consumers to drastically reduce consumption.
Interestingly, the equity market seems to be "immune" to this crisis. The AI phenomenon is seen as driving markets so convincingly that it is masking geopolitical risks. Investors are now more focused on the potential for big profits from AI commercialization than on the threat of stagflation. However, strategists warn that market sentiment is now in the “hot” zone and investors are already over-positioned, which historically precedes periods of lower returns.
The effects of this second round of war are now starting to trickle down to the food and natural gas sectors. Rising gas prices are directly increasing the cost of producing fertilizer, which will translate into higher global food prices with a time lag. This means that while headline inflation figures (CPI) appear to be stable for now, the real pressure on supermarket shelves will only be felt in a quarter or two.
The government bond market remains stable with the 10-year US Treasury yield at 4.322%, suggesting that investors have not yet panicked in a big way. In Asia, stock markets in Japan and South Korea continued to rise, driven by strong corporate fundamentals. This suggests that the investment world is now more sophisticated in separating regional geopolitical risks from structural global technological growth.
Overall, the market is going through a unique “war economy” phase. Confidence in AI is acting as a shield, while oil prices are acting as a burden. The main focus for investors this week will be to see whether the new Iranian proposal will be accepted by Washington or if the market will be forced to endure a more acute period of disruption in the Strait of Hormuz.
