Key insights
- Deutsche Bank identifies four reasons for the muted market rally post-US-Iran deal: hawkish Fed policy increasing real yields, markets already pricing the conflict as temporary, stretched equity valuations after a significant rally, and lingering geopolitical risks. The rising real yields and high valuations are seen as key headwinds, suggesting limited upside despite geopolitical relief.
Investing.com -- Despite a drop in oil prices following last week's U.S.-Iran interim agreement, risk assets didn’t benefit much, and Deutsche Bank analyst Henry Allen laid out four reasons why.
First, the analyst said the Federal Reserve's hawkish pivot has pushed up real yields, offsetting the geopolitical relief.
Half of the officials participating in the dot plot signaled at least one rate hike this year, and new Chair Kevin Warsh emphasized restoring price stability.
The U.S. 10-year real yield closed at 2.22% following the Fed decision, its highest level in over a year, effectively "counteracting the initial relief that came after the deal was agreed."
Second, Deutsche Bank stated that markets had consistently priced the conflict as temporary, limiting the upside from any resolution.
The oil futures curve had already reflected expectations of lower prices ahead, meaning "the upside was always more limited once a deal was reached."
Third, valuations were already stretched after an historic two-month rally.
“Most notably, the S&P 500 was up +16% in a two-month period, something we’ve only seen on four other occasions since WWII,” wrote Allen. “Moreover, three of those were post-recession bouncebacks, so it’s only happened once in a non-recession context, which was a few months before the Black Monday crash in 1987.”
Fourth, the analyst highlighted that traffic through the Strait of Hormuz is still "at just a fraction of its pre-conflict levels" and Brent crude still approximately 30% above year-start levels despite the interim deal.
Deutsche Bank said longer-term optimism remains warranted, noting that Fed hawkishness driven by upside growth surprises is "a scenario markets can weather," and that the current setup differs meaningfully from the conditions that preceded the 1987 Black Monday crash.