Latest risk turnaround in markets might not go unchecked – Credit Agricole

Credit Agricole argues that markets are currently riding a wave of optimism all thanks to US president Trump giving hope that a peace deal looks to be on the cards. However, the firm doesn’t quite see things panning out that way with the US and Iran still unable to come to terms on “a number of key issues”. At this stage, it’s pretty much only on the nuclear agreement I would say.As such, they view that the latest risk rally in markets could still run into a few stumbling blocks before the whole Middle East conflict subsides. And if so, the dollar selling in the past week could very well reverse course especially if the de-escalation in tensions turn back to re-escalation instead.Credit Agricole notes that:”FX investors seem to believe that the TACO (i.e. “Trump Always Chickens Out”) trade is very much alive and well and that the end of the conflict with Iran is drawing close, making risk assets attractive and weighing on the USD across the board. We disagree with the above explanation for several reasons: (1) the blockade of the Strait of Hormuz need not lead to a de-escalation anytime soon, given how far apart the US and Iran remain on a number of key issues; (2) the benign market response so far could ‘encourage’ the US to ramp up pressure on Iran and to re- escalate the conflict; and (3) while some of the recent US data has disappointed, large swathes of the economy still seem robust enough to help the economy outperform the likes of the Eurozone and the UK.We conclude that the US blockade could drag on, restrict global energy supply further and increase the risk of growth-negative energy demand cuts by energy importers. We thus doubt that investors can have their TACO and eat it too and disagree that the latest risk rally can continue unimpeded.”(h/t @ eFXdata)
This article was written by Justin Low at investinglive.com.

🔗 Source