Despite the interim US-Iran deal and a considerable fall in oil prices, risk assets have barely moved, with the S&P 500 still beneath its record high from early June and credit spreads widening.
The puzzle reflects four competing forces, Deutsche Bank analyst Henry Allen argues
First, the Federal Reserve’s hawkish pivot last week has pushed up real yields, counteracting the initial relief from the geopolitical breakthrough. The US 10-year real yield closed at 2.22% on Wednesday after the Fed decision, its highest in over a year, whilst Germany’s equivalent hit a five-month high of 0.89%. Second, markets had already priced in a temporary resolution to the conflict through oil futures curves, limiting the upside potential once a deal was actually reached.
Third, risk assets staged a historically powerful rally over April and May, with the S&P 500 gaining 16% in two months, a move not seen since World War II except in post-recession bouncebacks or just before the 1987 Black Monday crash. The CAPE valuation ratio has now reached its highest level since 2000, the dot-com bubble era. Fourth, structural supply constraints remain unresolved despite the interim agreement.