The performance of the major global stock indices following the US government’s announcement that the war against Iran had ended with a ceasefire agreement confirms international investors’ belief that the conflict will not resume.
The new all-time high recorded by the S&P 500 index not only reflects the end of hostilities in the Middle East but also appears to minimize the medium-term economic impact of the sharp rise in energy costs and the resulting logistical bottlenecks. Given the apparent resurgence of tensions between the two sides in recent days, this complacent stock market optimism may seem misplaced. However, pragmatically, a resumption of hostilities does not seem a viable option, as it would benefit neither side. Trump has achieved his tactical objective of dismantling the OPEC oil cartel, while strategically, the recent meeting with the Chinese Prime Minister and the Russian leader’s upcoming visit with Xi appear instrumental in shaping a renewed global geopolitical order, which will also contribute to resolving the issues related to the two main ongoing conflicts.
On the other side, Iran, which understandably opted for economic warfare given the disproportionate military forces at stake, no longer appears capable of sustaining it, given the dire economic crisis it faces. If prolonged, this crisis could only lead to a popular uprising that would overthrow what remains of the regime. But behind the surprising bullish momentum, especially in US stock indices, lies a significant innovation, the medium- and long-term implications of which have perhaps not yet been fully appreciated. Indeed, with regard to the implementation of US monetary policy, the arrival of the new administration has seen a sort of changing of the guard, if not ousting, from the Treasury to the Federal Reserve. Effectively, starting in 2025, monetary policy decisions that impact the level of systemic liquidity—whether to stimulate or restrict credit—are no longer made solely by the Fed, using the cost of money as a tool, which has been relegated to the background. Instead, they are determined by the Treasury, balancing bond issuance against consolidated bonds and repurchasing medium- and long-term securities on the secondary market. The purpose of this changeover is to control the volatility of the sovereign bond market, as measured by the ICE MOVE index, which functions like the equity VIX. For the Treasury, it is important that this indicator remains below the current level of 80, as increased volatility through rising yields decreases the value of securities pledged as collateral by the banking sector, reducing systemic liquidity. Stabilizing the MOVE index through market interventions on securities is also of economic importance, as evidence shows that the index’s performance
leads, by approximately six months, the performance of the PMI macroeconomic indicator for the US manufacturing sector.
Nicola Bravetti Data Source: Bloomberg
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