A surreal spectacle is playing out. The war in West Asia has choked the jugular of global energy supplies. The sentiments are yo-yoing between Donlad J Trump’s Operation Epic Fury and epic fears. The markets, however, are scarcely bothered and seem to be punting on epic TACO! There is the story of the post-Covid rally and then there is the rush of retail FOMO (fear of missing out). As for the whales, they are convinced Trump always chickens out when faced with public ire.
The wall of worries is real for consumers, companies and countries. Trump’s trade war upended global supply chains and the war on Iran has triggered an energy shock, alienated allies and fuelled anxiety. This week, International Energy Agency chief Fatih Birol warned restoration of crude and gas output could take two years. Prima facie, oil prices seem stable, thanks to workarounds a.k.a. jugaad; but the reality is scary. Listed price of crude is at $90 a barrel, but spot prices of Brent crude is at $138, jet fuel is $2,200 a kilolitre in New Delhi, the Indian oil import basket is at $110, and heavy crude from Ural or Iraq is 20 percent higher.
The markets are now treating volatility as the weather, not a storm. Events have not dented the optimism of bulls who are discounting bad news and piling premium on a repeat of 2022. On Friday, Iran declared that the Strait of Hormuz was open. Trump followed with a trademark all-caps post: “The Strait of Hormuz is completely open and ready for business and full passage. But the (US) naval blockade will remain in full force.” Within a few hours, shippers found that in this theatre of the absurd ‘open’ did not mean open.
However, the markets are not letting facts ruin a good story. Portfolio values are up even though newsfeeds on touch-screen devices are on fire. It doesn’t matter that over 300 tankers are trapped in the high seas, that lower capacity will keep crude prices higher, that energy inflation and supply disruptions will push interest rates higher for longer. The IMF warns that the war has halted the momentum of global growth; add to it the rise in deficits and debts crippling economies.
The markets are paying scant attention to what might happen. They are weighing in favour of investments in AI infrastructure and shrugging off the impact on job losses, not even the five-digit trimming of the Amazon kind. Indices are on a tear. Soon after Hormuz was declared open, every major stock market in Europe and the US was up, India’s Nifty50 grabbed hope to rise 156 points, the S&P500 hit a new high of 7,147. Even though there was little evidence of free movement, as tracking showed a few tankers passing through the Hormuz Strait, the petro-paper market found reason to celebrate and Brent dipped below $90, the US dollar index rose and gold nudged up.
The whiplash of headlines remained unabated. On Saturday, Iran’s Parliament Speaker Mohammad Bagher Ghalibaf said Trump was making false claims, that the strait would not stay open if the US blockade continued. Interestingly, Iran’s navy was warning ships over radio that the strait would be opened on the order of the Ayatollah, ‘not some idiot’. By Saturday afternoon, ships and tankers were executing U-turns.
Money moves the mare and markets. Among the mantras often chanted in markets is, ‘Don’t fight liquidity.’ Money poured in by central banks in 2008 and then during Covid is still sloshing around looking for returns. The resilience of Indian indices is propped by monthly systematic investment plan flows of `25,000 crore. Liquidity tends to chase returns—for instance, in gold and silver earlier and in high-interest bonds now. The markets believe that Trump’s tariff war is theatre. If it turns into a tragedy, there is Europe and East Asia doing better than the US. Above all, there is a global belief that AI-led productivity will boost earnings and value. The core thesis: wars and tariffs are temporary; technology and value are permanent.
Earlier this month, Henry Paulson, former US treasury secretary, warned the $39-trillion American federal debt could break the bond market and spark an emergency. Sovereign debt issuance in OECD countries is projected to reach a record $18 trillion in 2026. A study shows that 40 percent of the sovereign and corporate debt held in OECD countries will mature by 2027. This has implications for investments and job creation.
Characteristically, the markets are frequently convinced of their own genius. There is yet no cogent answer for the violation of the holy grail of concentration risk—only seven stocks account for $19 trillion or 30 percent of the S&P500’s total market value. IT services companies—the largest formal employers, exporters and force multipliers in India—are facing an existential threat. Services deliver over half the growth in large economies. Yet the markets are shrugging off the impact of AI-led job displacement on consumption that scaffolds growth. Can markets sustain optimism if consumption slides?
In theory, markets are, at their most basic, a discounting machine. They price in expectations, not headlines—ergo the cliché, ‘buy the rumour, sell the news’. The wall of worry—tariffs, AI disruption, hot wars, cold geopolitics—is exactly what markets have always climbed. That said, the level of disdain for the consequences of Trumponomics playing out in the global economies is truly stunning. The theme song for now is Bobby McFerrin’s ‘Don’t worry, be happy’.
Read all columns by Shankkar Aiyar
SHANKKAR AIYAR
Author of The Gated Republic, Aadhaar: A Biometric History of India’s 12 Digit
Revolution, and Accidental India
(shankkar.aiyar@gmail.com)