Equities Look Through The Noise As A ‘Trump Put’ Potentially Emerges

Since conflict broke out in the Middle East, markets have settled into a bit of a rhythm, in spite of relentless headline news flow continuing on a daily basis.

By and large, for equities at least, that rhythm has been one where the week has tended to start with a gap lower, which has relatively quickly faded, with dip buyers entering the fray, often resulting in the market notching notable gains on a Monday. Subsequently, though, the tide has started to turn, with pessimism then creeping in as the week progresses, before a broad-based de-risking into the weekend.

This week, though, has been a little different. We got the risk-on rally to kick things off, ably assisted by President Trump’s ‘Truth Social’ post postponing possible strikes on Iranian energy infrastructure. Since then, though, we’ve not seen the risk aversion that has characterised the prior weeks of the conflict, and instead have seen equities largely tread water.

This change in dynamic is notable and suggests that, despite all the noise, market participants are able to focus on the key signal that this week’s developments have sent. Namely that, at face value at least, the Trump Admin seem open to finding an ‘off-ramp’, and are attempting to find a way of de-escalating the conflict.

That said, we remain some way off a ceasefire from being agreed, and kinetic action is continuing in the Middle East, all the while the Strait of Hormuz is still essentially impassable, and the impact of the energy price shock, and tight commodity supply, continues to mount.

Still, the latest ‘TACO’ moment does appear to have shored up risk sentiment to a certain degree. Not only does it show that President Trump is still receptive to feedback from financial markets, it also reiterates that there remains, to some extent, a pain threshold that we likely breached. In other words, the ‘Trump Put’ still exists.

Added to which, that ‘TACO’ moment has helped to reinforce the idea that participants are desperate not to get ‘caught short’, given that the entire outlook could turn on its head in a matter of seconds, based on the next social media post. Monday’s rally gave a teaser of how the market reaction to a potential ceasefire agreement could pan out, and with ‘escalate to de-escalate’ having become a bit of a hallmark of the Trump presidency thus far, few participants would see the risk/reward as favourable in playing from the short side, when those positions could be violently squeezed out if/when a truce is agreed. That, in turn, results in something of a floor being placed under the market.

While that floor is in place, one certainly can’t rule out a fresh round of de-risking as we move into the weekend. It goes without saying that the geopolitical environment remains highly fluid, and that the risk of a renewed escalation is still present. Many participants, hence, are likely to prefer going flat on Friday, before reassessing the situation at the start of the new trading week, in what is by far the most prudent way to manage potential gapping risk at this juncture.

Regardless, the overarching message from the geopolitical sphere this week has been that Trump is seeking a way out of the conflict. The overarching message from markets, meanwhile, is a more upbeat one as a result, potentially setting things up for something of a tactical bounce if further steps towards de-escalation are taken.