I don’t have time to finish a sentence before new headlines send markets upside down.
When I returned to my desk on Monday, Trump had given Iran a 48-hour ultimatum — with only a few hours left before it expired. After that, he said he would “obliterate” the nation’s power plants. Oil was up and the market selloff was deep.
By the time I posted my morning note and grabbed a coffee, Trump had made a major U-turn, saying he would give Iran five days of ceasefire following “very good and productive conversations regarding a complete and total resolution of our hostilities in the Middle East” — his words on Truth Social.
US crude tanked 10%, Brent fell nearly 9%, yields dropped, and equity markets rebounded sharply — as if the war were over and we could return to peace. Remember peace? It’s been a while.
Fun fact: Iranian officials said there had been no direct or indirect contact with Trump. (sad trombone).
So yes, Donald Trump ‘Chickens Out’—because the Iranian bite was probably too big to be swallowed, but him ‘chickening out’ won’t calm the game if Iranians don’t comply.
Therefore TACO optimism could hardly last. The idea that Trump can act alone and shape outcomes doesn’t hold if the counterparty refuses to engage. Any resolution in the Middle East is also contingent on Iran’s willingness to de-escalate.
The Strait of Hormuz remains effectively constrained, with only a limited number of tankers crossing the critical waterway, and oil is rebounding this morning — both Brent and WTI are up more than 3% at the time of writing. Equities are under pressure again, with Asian indices giving back earlier gains.
Trump’s five-day ceasefire is set to end toward the end of the trading week — no surprise. What happens next is anyone’s guess.
But yesterday’s price action suggests that investors are more afraid of missing a post-war rally — similar to the post-“Liberation Day” rebound — than of getting a few entries wrong. They continue to look for any hint of optimism.
Meanwhile, policymakers are watching through a more critical lens. European Central Bank (ECB) officials warn that the current energy shock could turn into stagflation if prices remain high and volatile.
In Japan, recent data showed inflation easing to near a four-year low, but the country’s largest labour group secured average pay rises above 5% for a third consecutive year — well above inflation — complicating efforts to stabilise price dynamics, especially alongside rising energy costs. The USD/JPY eased to 158 yesterday amid a broadly stronger US dollar following Trump’s unverified Iran announcement. The pair is rising again this morning, as the dollar rebounds more broadly on the realisation that Trump cannot unilaterally ease geopolitical tensions.
Market sentiment is fully dependent on war headlines and energy prices. Reactions are highly emotional: investors want the war to end, the latest selloff to be “the dip,” and to catch that dip. But uncertainty remains, and the TACO trade is only sustainable if Iran plays along.
So we wait — watching both headlines and data.
Today, we will get a first glimpse of how global economic sectors are reacting to rising energy prices and escalating tensions in the Middle East. Preliminary March PMI expectations mostly point lower, reflecting weaker demand and rising anxiety over a potential new energy shock and tighter monetary conditions.
- In Australia, both manufacturing and services PMI declined, with services slipping into contraction below 50 and manufacturing hovering near the threshold. Recall that the Reserve Bank of Australia (RBA) raised rates for the second time in a row at last week’s meeting.
- Japanese PMI figures also weakened, pointing to slower expansion in both services and manufacturing. The Bank of Japan (BoJ) remains on a gradual normalization path to keep inflation pressures in check.
- European PMI figures are expected to tell a similar story: softer activity amid higher energy costs and tighter financial conditions.
But softer-than-expected PMI data is unlikely to reverse the recent hawkish shift in central bank expectations. On the contrary, slowing growth combined with rising inflation pressures will fuel stagflation concerns and could weigh further on sentiment. In this environment, good news will be good news — and bad news will be bad news.
Looking ahead, even if the war were to stop today, repairing damage to Middle Eastern energy infrastructure would take time. Estimates suggest it could take months — even years — to fully restore output to pre-war levels.
As such, an energy-driven market shock would be harder to dismiss than a Trump-driven trade crisis — the backdrop against which the TACO acronym emerged. In that episode, Trump acted unilaterally, counterparts had limited leverage beyond negotiation, and eventual tariff rollbacks provided relief. The situation with Iran is fundamentally different.
That said, this remains a cautious view. Nothing prevents investors from buying like there is no tomorrow on any sign of optimism, overlooking risks, stretched valuations and margin pressures from rising energy costs.
