Trump's "verbal easing" fails, crude oil "spot shock" approaches, and the US stock market is really panicking!

The ongoing conflict between the U.S. and Iran continues to weigh on market sentiment, with the S&P 500 index declining for five consecutive weeks, and Trump’s “verbal easing” is proving ineffective.

On Friday Eastern Time, the three major U.S. stock indices all closed lower, with the Dow Jones Industrial Average entering a technical correction zone and the Nasdaq Composite Index’s decline expanding to over 10%. The “spot shock” in the oil market is transmitting from futures prices to physical supply, as the market’s trust in Trump’s verbal statements continues to wane.

Brent crude oil closed at $112.57 per barrel on Friday, marking the highest closing price since July 2022. In the past 13 trading days, Brent crude oil has moved inversely to the S&P 500 index on 12 occasions. The blockade in the Strait of Hormuz persists, with analysts estimating that approximately 10 million barrels or more of oil transiting through the strait are effectively stalled daily.

On Thursday, Trump posted on social media stating that Iran had allowed some commercial vessels to transit the Strait of Hormuz, but this statement failed to prevent oil prices from continuing to rise on Friday. Iranian media reported that any country supporting the U.S. and Israel is prohibited from allowing the passage of vessels in their ports.

Trump’s “verbal easing” is failing

In recent weeks of trading, the expectation that “Trump could brake at any moment” has been a key support in curbing larger market declines. However, as the conflict drags on, this support is showing signs of cracking.

Barclays analysts wrote in a report on Friday, “The ongoing flip-flopping of positions and headline fatigue is severely undermining the effectiveness of the ‘Trump put option,’ as the situation remains fluid and quite chaotic.” The so-called “Trump put option” refers to the market’s trust in Trump’s ability to bolster market confidence through policy statements.

StoneX market analyst Fawad Razaqzada bluntly stated in a report, “Trump’s control over the market is diminishing, and investors seem to no longer take his statements at face value, even starting to trade against them—they are waiting for substantial evidence rather than words.”

Dan Alamariu, Chief Geopolitical Strategist at Alpine Macro, also pointed out that this crisis is fundamentally different from Trump’s past “threat withdrawal” patterns: “This time, Iran holds veto power, at least has voting rights, and you can’t ‘TACO’ (referring to Trump’s usual threat withdrawal pattern) this.”

Despite Trump’s three attempts to verbally intervene to lower oil prices (a 5-day delay, a “ceasefire” proposal, and a 10-day delay), WTI crude oil still closed flat this week, with prices rising back to levels prior to Trump’s verbal intervention.

Strait blockade: Buffer stocks depleted, physical shock approaching

The core panic in the market is shifting from “possible future oil shortages” to “current oil shortages.”

In the weeks prior, as the U.S.-Iran conflict erupted, oil tankers that had set sail from the Persian Gulf completed their loading before the escalation of the conflict, providing some buffer to the market. According to Ole Hansen, Head of Commodity Strategy at Saxo Bank:

“Most of the tankers that set sail from the Persian Gulf before the conflict escalated have completed their journeys and unloaded, as new supplies are limited, the initial buffer that suppressed oil price surges is rapidly being consumed.”

Notably, the spot prices of Middle Eastern oil are significantly higher than financial benchmarks like Brent or WTI, and this price gap is seen as a precursor to physical supply shortages spreading to other regions, putting investors on high alert.

According to an article previously published by Wall Street Journal, the blockade of the Strait of Hormuz is triggering a “shockwave from east to west” in the oil market: Asian inventories are nearly at their limits, and the Philippines has declared an energy emergency; Africa is under pressure in early April, and Europe in mid-April.

This indicates that the “slow upward grind” of oil prices remains in motion. Macnamara stated, “As the actual situation gradually replaces headline effects, oil prices are slowly but steadily climbing.”

Behind the five-week decline: Panic not yet peaked

From a technical perspective, the situation for the three major indices is quite severe.

The S&P 500 index has seen five consecutive weekly declines, marking the longest streak since the impact of the Russia-Ukraine conflict on global markets in 2022, with a cumulative decline of 7.4% in March. The Dow Jones index fell sharply by 1.7% on Friday, down 793 points, officially entering correction territory; the Nasdaq index fell 2.1% on Friday, having confirmed its correction the previous day.

Sentiment indicators are also raising alarms. The Cboe Volatility Index (VIX) surged above 31 on Friday, far exceeding the long-term average of around 20. According to data from Citadel Securities, demand for put options on the S&P 500 index, betting on further declines, has surged significantly, with the “skew” indicator measuring market bias rising to its highest range in nearly five years.

Carol Schleif, Chief Market Strategist at BMO Wealth Management, stated, “From a psychological standpoint, this war of attrition is exhausting, and the market is struggling to digest a crisis that was initially expected to end quickly.”

Alamariu, in a more straightforward manner, described the current market state: “The peak of panic has not yet arrived. Panic, by definition, is irrational, and the market does not know how to price it.”

Macroeconomic transmission: Inflation expectations rising, rate cut expectations waning

Energy prices continue to rise, transmitting through multiple channels to the macroeconomy. Wall Street has broadly raised inflation expectations and reduced bets on the Federal Reserve cutting rates within the year.

Mark Hackett, Chief Market Strategist at Nationwide, stated that although the fundamentals of the U.S. economy are currently robust, “if the conflict cannot be clearly resolved and the energy market cannot stabilize, it will be difficult for the market to sustain an upward trend.”

Barclays analysts also warned, “Meanwhile, the war continues, and the longer the oil price shock lasts, the more severe the stagflation impact will be.” Currently, Iran shows no signs of rushing to compromise, Israel has ramped up airstrikes, and the U.S. is reportedly sending more troops to the region.

BMO’s Schleif summarized the market’s demands: “The market wants to see a framework for stability in the Middle East and the reopening of the Strait of Hormuz for critical tanker transport. The market wants to exit this predicament.”

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        The market carries risks, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account individual users' specific investment goals, financial conditions, or needs. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this carries responsibility.