From the studio

Podcast: Jump Start | Trump threatens blockade after peace talks stall (6 mins)
Video: Investors Club | Ceasefire implications, plus the alternatives playbook (7 mins)

Thought of the day

Energy prices jumped and stocks fell on Monday morning after the 21-hour-long weekend negotiation between the US and Iran failed to produce a peace agreement. In response, US President Donald Trump announced that the US navy would block all ships trying to enter and leave the Strait of Hormuz, escalating the conflict with Tehran.

Brent crude oil was trading 6.8% higher at USD 101.7/bbl at the time of writing, while benchmark European natural gas prices surged as much as 18%. S&P 500 futures are pointing 0.6% lower ahead of the US market open, following declines across Asia and Europe.

These early Monday moves were a reverse from last week, when optimism over a potential diplomatic solution to hostilities in the Middle East buoyed global equities and kept energy prices under pressure. The S&P 500 ended last week only 2.3% from its all-time high and back in the 6,800-7,000 range it traded in for the three months prior to the conflict.

With the Iran war entering its seventh week, we offer our perspectives to help investors navigate the uncertainty ahead.

The path toward de-escalation is likely to be bumpy, and re-escalation remains a risk. We have noted that negotiations would be difficult, given the significant differences between Washington and Tehran over many issues, from control of the Strait and war reparations, to Iran’s nuclear and ballistic missile programs and sanctions. With both Trump and Iran’s leaders employing a hardline approach in recent rhetoric, we expect any path toward a clear de-escalation to be bumpy.

But we also believe both sides remain incentivized to find a solution. How and whether the US can effectively blockade the Strait of Hormuz remains to be seen, but the move is likely to exert pressure on Iran given the Islamic Republic’s reliance on oil exports for its economy. The Trump administration also likely seeks to avoid a prolonged conflict that inflicts economic pain for households, especially as the midterm elections approach and the president’s popularity ratings decline. The fact that direct negotiations happened is reason to think that we are likely past peak geopolitical risk, and that both sides wish to avert a worst-case scenario of a prolonged closure of the strait and further damage to civilian and energy infrastructure. Iranian parliamentary speaker Mohammad Bagher Ghalibaf’s comments on “this round of negotiations” also point to the possibility of further dialogue.

Energy prices remain key for markets. How quickly, and to what extent, traffic through the Strait of Hormuz will normalize remains a key market focus. We believe a full normalization of flows will take time—not only depending on the safety of crossing the waterway, but also the return of shut-in production. While it is unlikely that energy prices will fall back to pre-conflict levels in the near term, a pullback from March highs should still offer some relief to market concerns over inflation and interest rate hikes.

So, given the economic costs of higher oil prices and with the immediate turn of events highly uncertain, we think investors should avoid attempts to “trade” geopolitics. We maintain the view that long-term investors should stick to their strategic portfolio allocations and utilize volatility to enhance portfolio resilience through diversification and hedging. We continue to position for medium-term upside in equities and see value in quality bonds, gold and broad commodities, capital preservation strategies, and alternatives such as hedge funds.