Trump's tales are still muddling markets

Investors really want to believe in fairy tales. Day by day, week by week, as the war in Iran grinds on, they display admirable optimism as a group, seizing on every hint or suggestion, no matter how flaky, that US President Donald Trump will back down, it's going to be OK and we will all live happily ever after. This is somewhat understandable. After all, 2026 was on track to be a very decent year for risky assets -- more than decent in fact. The AI trade had its challenges, but the exuberance was still largely in play, interest rates were pointing lower, and US fiscal policy was expected to tickle the markets' tummy. All the stars were aligned for a tip-top year before this war came along, and investors are itching to get back to normal, just as they did after the global tariffs farce a year ago. More than anything, they want to buy the dip. Pick pretty much any trading day since the war started and you can see evidence of this dynamic. But the past week has been especially stark. On Wednesday, US stocks posted their best day in almost a year, jumping by nearly 3 per cent, and oil prices sank back under $100 a barrel, after the US president declared he would end the war "very soon". Just hours later, however, this proved to be yet another sucker punch when in an address from the White House, Trump escalated his rhetoric against Iran all over again, claiming he would "bring them back to the Stone Ages, where they belong". So, here we go again. Oil shot back up, stocks dropped back down, and we're back on the treadmill, with trust in the words of the president eroding at pace. It is starting to feel as if the entire global stock market is an elaborate pump-and-dump scheme. One curiosity here is that, even despite the plainly obvious fact that Trump is not in total control of the war, and Iran is in fact in control of a crucial part of the global energy market, investors just keep on falling for the president's more warm and fuzzy statements. Analysts and investors say that "headline fatigue" has set in, they are doing their best to screen out the noise, and they have diminishing confidence in his ability to turn markets around. The constant flip-flopping over the past few weeks has, I'm often told, crushed the president's previously reliable magic ability to pull stock markets out of a hole. But the numbers don't lie. Markets really do still respond to the president's pronouncements. It's hard to see a way off this hamster wheel. So far, market ructions have been actually quite modest, again on the assumption that the US will back down given the risk of resurgent inflation running in to November's midterm elections. The hit to stocks has so far been a walk in the park compared with the period after Trump's global tariffs announcement in 2025. "Are financial markets sleepwalking?" asked BNP Paribas chief economist Isabelle Mateos y Lago in a note this week. Generally tame moves in asset markets in this crisis so far reflect an assumption that global economic growth will hold up. "But far worse outcomes are also very plausible," she added. "Not seeing them priced in to a greater degree . . . could cause trouble if this changes abruptly." A thin and winding path out of this crisis still exists. But it is clearly time to start taking potentially much more adverse outcomes for the global economy and for the wealth all of us have locked up in markets, much more seriously. "The war is now best thought of as a chokepoint crisis with system risk, and has moved into a domain in which escalation is non-linear and difficult to control," wrote Wei Yao, an analyst at Société Générale. In theory, that in itself should be enough to deter the US (and Israel of course) from constant escalation. But we're quite a long way past assuming everyone will act in their rational self interest. This leaves professional investors treading on eggshells, especially when typical safety plays, like gold and the dollar, are not working as well as usual. "You're up, you're down, there's no trend to the volatility, so it forces investors to get small," said Greg Peters, co-chief investment officer for fixed income at PGIM. "It's just really hard. You think you have a competitive advantage, and there is none." The bond markets in which Peters is a specialist, and which underpin the financial system, are already showing signs of strain. It is becoming trickier to get trades done, and shorter maturity bonds, which are more sensitive to what central banks do next, have been on some wild rides as investors brace for the possibility of previously unexpected interest rate rises. It seems likely that those market moves have been excessive, and this is all overdone. "I think it is," said Peters. "But I wouldn't bet my career on it . . . Next week it could be the opposite." This is really all investors can do. Tread lightly, assume nothing, and don't get swept away by the idea that a brave prince will save the day. It's time to dig in for a long period of radical uncertainty.