1. Oil Plummets
As I write this, WTI crude has cratered from around $117 to around $92.50 — a 21% drop after Iran agreed to allow safe passage through the Strait of Hormuz as part of a last-minute ceasefire brokered by Pakistan.
The closure had been cutting off roughly 20% of the world’s oil supply since the conflict erupted in late February, sending crude soaring. The fear premium is unwinding fast now. Oil market is thinking this two-week peace maybe lasting a while, or the oil supply is somewhat normalized.
For energy names, this is a body shot. Energy stocks were the darling of the market over the past month or so. Wouldn’t be surprised to see them taking a beating. Remember quality vs quantity.
2. Stocks Rally
As the ceasefire announcement came in, stocks started to rally. Overnight, looking at futures, gains were held very well.
S&P 500 will be testing its 200-day moving average and the 200-day moving average today. If there’s a close above it (possible…unless some news break that ruins everything), likely the rally continues. Keep in mind, 200-day moving average and 50-day moving average are watched by a lot of people, and people tend to react around it.
Plus, we are going to get short squeezes in name that were reactive to oil prices (talked about this yesterday). Tech was lagging behind, that has a potential to catch a breath. Lots of opportunities near-term. But beware of the gap that will be left unchecked… that will have to be filled eventually.
Short-term, everything is bullish for now.
However, keep the big picture in mind: economy fragile, its only 2 weeks ceasefire for now, oil is still very edgy, rates aren’t coming down, etc.
3. Metals Pop
Gold is trading around $4,800 this morning — 2.9% pop. But, well below the all-time highs.
The big question now: does easing Iran tension mean higher gold? We go back to the previous trade/narrative — central bank buying, dollar uncertainty, runaway deficits ? $4,400 is where the big support sits for now. Below that around $4,100. On the upside, $5,000 would be the big level to watch.
Silver is popped to around $77.
Copper at $5.76.
Palladium, platinum, nickel, and other catching a bid too.
Why? There’s some relief, and there’s dollar falling a bit after the ceasefire announcement.
4. Stagflation Still Possible?
The Fed releases the minutes from its March 17–18 meeting today. We get to see how the Fed is thinking and let’s see if it starts some rate cut noise. 10Y is at 4.2% – taking a breather too.
Powell publicly pushed back on the word “stagflation,” saying he’d reserve it for more serious circumstances. But zoom out: inflation above target, growth slowing, an oil shock complicating everything. Call it what you want really.
At Zulfiqar Research, we continue to build a thesis that we are seeing some sort of demand destruction event rather. So, disinflation, and borderline deflation could even be a possibility (for a short period). This has a potentially to throw a wrench in the equation. If there’s even whiff of this, Fed could have a lot of reason to panic.
5. Private Credit Getting Attention
Privat Credit is starting to get some attention.
One story making the rounds – not new, but showing up in finance blogosphere – “Bad PIK” — when distressed borrowers pay interest with more debt instead of cash — hit 6.4% of total private debt volume.
From what we can gather (keep in mind, this is super opaque place of the financial world) mid-market firms have interest coverage ratios below 1.0x — meaning they cannot generate enough cash to cover even the interest on their debt. Default rates seem to be increasing.
The “zero-loss fantasy” that powered private credit’s rise is cracking. This asset class has never been tested by a real cycle. We may be about to find out what’s actually inside these funds… and who’s swimming naked.