Lame Dux Bellorum

By Benjamin Picton, senior market strategist at Rabobank

The NASDAQ and S&P500 rallied on Friday despite a stronger-than-expected payrolls report helping to push Treasury yields higher. The Treasury curve bear flattened as two-year yields rose by 5bps, and ten-year yields lifted by 2bps. 

There was a strong hint of bargain-hunting as investors again piled in to tech stocks that had been brutalised in the previous session, thereby perpetuating a recent volatility spike that AI-trade sceptics will be tracking with great interest. By contrast, the less glamorous and more value-oriented Dow Jones index posted a fall of 0.46%, led lower by a consumer discretionary sector that was less than enthused by the increased prospect of Fed hikes.

Oil prices were little changed on Friday with Brent closing just above $98/bbl and WTI sitting a little above $90, but Brent is being offered in early trade today. Oil prices fell by almost 16.5% over the course of last week as a war-weary American electorate delivered a Democratic sweep of the House of Representatives, the Senate, and some longshot Gubernatorial races. 

President Trump now faces a hostile Congress and the prospect of serving out the remainder of his term as a lame duck. Those legislative constraints will likely kill off Republican hopes for fiscal expansion, particularly the planned increase in military spending to $1.5trn. Bond traders might be breathing a sigh of relief on that score, but loss of influence over domestic affairs only increases the likelihood that the focus will be on foreign policy from here on out.

Increased legislative constraints are sucking some war premium out of the oil curve, but higher freight and insurance prices add cost to every marginal barrel and limit how far prices can fall. 

The long end of the curve has drifted higher as markets perhaps begin to countenance the possibility that the Middle East never goes back to what it was, but it’s worth noting that long-end prices remain below levels seen before the war. Perhaps traders pay some credence to Scott Bessent’s claims that the importance of the Strait of Hormuz will be structurally diminished, gifting the world a more resilient energy system and lower risk premia in the future? 

If that’s the case, it is a long way off. Speaking on Sunday, Secretary of State Marco Rubio said that diplomatic efforts with Iran remain unproductive because Iran’s demands are “not just unacceptable, but in some cases outrageous and ridiculous and really not realistic”. 

Iran – perhaps emboldened by the electoral setbacks of the Trump administration – says that de-escalation remains possible but is contingent on the US lifting its blockade, delivering sanctions relief, and implementing the terms of the Islamabad MOU. There are no guarantees on the crucial nuclear issue, which was the casus belli in the first place. President Trump has said in recent days that he will not order strikes if there is a prospect of diplomatic efforts succeeding while qualifying that remark by saying that he will order strikes if needed.

That sounds like the script from February when nuclear talks in Geneva were supposedly being given space to succeed even as carrier strike groups deployed. Current negotiations are going so well that the USS Theodore Roosevelt carrier and the amphibious assault ship USS Makin Island are en route to the Gulf right now and CENTCOM just announced the ‘Iron Gate’ taskforce to crack down on Iranian weapons re-supply via overland routes and the Caspian Sea.

The weekend saw fresh strikes conducted against Iranian targets on Qeshm Island and the UKMTO said that two tankers were targeted in the region of Hormuz on Sunday. The IRGC says it was three. That’s as the Houthi’s continued missile strikes on targets in Riyadh, including the headquarters of Saudi Aramco.

Weapons resupply through the Caspian Sea once again highlights the impression that the Ukraine and Iran conflicts are not truly separate, but part of a wider systemic rupture. Russia and Iran coordinate on arms production and intelligence, while China supplies dual-use goods and plays the role of financial lifeline by acting as a willing buyer for sanctioned energy cargoes. The emerging Cold War 2.0 vibe was further highlighted this week by NVIDIA CEO Jensen Huang confessing infidelity with an executive accused of being a Chinese spy, though NVIDIA says there is no reason to suspect that trade secrets or national security (which are really the same thing for this company) have been compromised.

As argued here previously, the United States under Trump would like to do a ‘reverse Nixon’ – isolating China by improving relations with Russia. Such a strategy faces resistance in Ukraine, Europe and the US Congress, but the administration appears to be giving it one more try through negotiations in Abu Dhabi this week. Hints have been dropped of a kind of Yalta-style ‘grand bargain’ whereby concessions are made regarding Russia’s historical grievances over NATO encroachment and security guarantees are offered. Many false dawns previously.

Meanwhile, Israeli President Herzog has invited opposition leader and former IDF chief Gadi Eisenkot to attempt to form a government. Eisenkot has said that he will pursue “creative and unconventional” paths to cobble together what he calls a “national emergency government”, including overtures to members of Prime Minister Netanyahu’s Likud party and ultra-Orthodox factions opposed to mandatory military service. 

President Trump said that Eisenkot and Netanyahu are “very similar in terms of their policy”, but Eisenkot has indicated a preference for economic pressure, diplomacy and targeted strikes against nuclear facilities, rather than supporting Netanyahu’s push an all-out regime change war. It could be the case that Eisenkot is more amenable to implementing the Gaza peace plan in full than Netanyahu is. That might be seen as a win of sorts for American foreign policy.

Back at home, hardliner Stephen Miller has replaced Susie Wiles as White House Chief of Staff. The Wall Street Journal notes that Miller was the architect of controversial immigration and drug enforcement policies and favors a maximalist approach to executive power. He has reportedly shown a preference to wind down the Iran war in the past but has consistently backed Trump’s decisions even when they have contradicted his advice. 

Is the appointment of a pugilist like Miller a signal that a lame duck President intends to serve out his term as Dux Bellorum?