One week / one topic: Stalemate

What happened?

Six months in, a Republican congressman gave the most honest summary of the US–Iran war: "Very clearly militarily, we are stalled. There's no question about that."

The cycle is repeating, and perhaps even intensifying with repeated attacks on shipping, the US striking IRGC targets and Iranian retaliation against US bases.

Despite all this, US Vice President JD Vance declared: “I wouldn't call it a war. Right now, there is no active shooting.”

Clearly, energy markets disagree.

The all-important prices of US diesel and European natural gas – the stuff that businesses and households actually consume – keep making new highs.

This shouldn’t be a huge surprise, since Hormuz handled a fifth of world oil and LNG flows before Iran effectively shut it.

To complicate matters, the bigger story may now be Yemen and not Hormuz anymore, as Houthi advances raise the prospect of a two-front threat to Gulf and Red Sea energy routes.

Looking at the wider market reaction, equities have apparently stopped caring long ago and remain enthralled by the AI story instead. (existential risks notwithstanding)

When it comes to bonds – while it remains very difficult to disentangle the drivers of the recent rise in expected short-term interest rates – all of the above clearly contribute to lingering inflation concerns.

While the upcoming US mid-term elections and continued economic pressure on Iran might have brought the parties back to the negotiating table, the stalemate continues.

The dire predictions that we heard back in March when the conflict started did not ultimately come true: the global economy adapted and kept ticking along, despite severely constrained energy flows through Hormuz.

Nonetheless, there is an invisible line somewhere – and it has only been getting closer.

What to with all this, then, given the underlying radical uncertainty?

Our observations

• Fundamentals: The conflict in Iran is arguably no longer a headline risk, since markets have gotten used to all sorts of starts and stops here.

  That said, rising energy prices keep businesses and households under pressure – and at some point, there could be a discontinuity.

• Price action: Investors desperately want to trade de-escalation, but somehow they keep getting dragged back in – especially on the fixed income side.

• Investor beliefs: For the last six months, investors have been implicitly asking “when does this end?”.

  …but what if it doesn’t end for another six months?.

So what?

In summary, equities are still treating this as a discrete, resolvable event; while rates markets are increasingly treating it as a regime.

Both can't be right…?

The temptation would be to wait for clarity — but a stalemate does not really allow you to do that.

So: no heroics.

Diversified, income-led, modestly cautious on duration — and resisting the urge to trade headlines that have been ripped apart within a fortnight for six months running.

Mood music: Fleetwood Mac – The Chain

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The information provided should not be considered a recommendation to purchase or sell any particular security.