Update from the Flightdeck

According to the equity markets, the war in Iran is over. Moreover, whatever else we were worried about does not really matter when we are making record highs again. The mega-caps led the way, up an incredible 20% in April, but even staples joined the party on Friday in the kind of broad-based rally you typically see once markets believe the inflexion point has passed.

Of course, the problem is that we are far from any agreement that would lead to a true and permanent de-escalation in the Middle East. Rather tellingly, oil prices are back above $90 this morning, the dollar is firmer, and bond yields are higher. That divergence matters. Equities are pricing relief, but everything else is still signalling risk.

Positioning is clearly playing a role. After weeks of uncertainty, investors were defensively tilted, underexposed to equities and overweight cash. It does not take much to trigger a sharp squeeze higher, particularly in the most crowded trades. Case in point, a basket of heavily shorted stocks tracked by Goldman Sachs jumped by more than 13% last week.

The reality is that all sides are under pressure. The US cannot afford sustained economic pain with midterms looming, Iran cannot back down without extracting concessions, and China cannot tolerate prolonged disruption to energy flows. That points to a deal, but not a clean or immediate one. Markets may be right on the outcome, but they could be underpricing the path to get there.