If yesterday’s five-minute relief rally taught analysts one thing, it’s that traders are keen to jump on the optimistic bandwagon when it comes to Iran. After weeks of volatile trade, yesterday Wall Street celebrated after President Trump indicated he was working toward a “complete and total” resolution of hostilities with Iran.
There’s one small issue: While Trump said there was “productive” conversations with Iranian leaders, Tehran reportedly maintained that “no dialogue” has occurred between the two nations. There are talks between intermediaries in Riyadh, but it’s not clear how far along they are, or how willing either side is to compromise.
Wall Street, however, has adopted a new behavioural trait since Trump returned to office: Investors are reacting (justifiably or not) to social media posts from the Oval Office without much verifiable evidence to go on.
Wall Street’s early optimism that the war in Iran would resolve relatively quickly means they are more inclined to act on positive updates from the commander in chief, according to UBS’s chief economist Paul Donovan.
He noted to clients this morning: “Markets are not reacting to information, they are generally reacting to social media posts and headlines—even if those posts or headlines are fake news or contradictory. The absence of verifiable facts is already complicating economic assessments, for instance, it is difficult to assess how much Dubai might have to spend repairing war damage, when there is little verifiable information about the extent of war damage.”
Wall Street has come to expect (indeed, sometimes bank on) rapid updates and changes in foreign policy under President Trump, often shared on social media rather than through more traditional channels. Trump’s social media posts have covered everything from tariff threats on trading partners and calling out specific businesses, through to criticism of the Federal Reserve chairman Jerome Powell.
The rapidity of these updates, and often the ensuing reverse ferret, has earned a nickname: TACO (Trump Always Chickens Out). The updates from the president on Monday, some have speculated, may the latest example of a TACO.
While it could be argued that Trump’s social media posts, above all others, should be monitored by investors, Donovan highlights that this should not obscure factual information. He added: “There is now a risk that investors will start looking for leading indicators of social media posts, rather than leading indicators of actual indications.”
Confirmation bias
There’s a further issue: Traders want the war in Iran to be over. When the U.S. and Israel launched strikes on Iran, Trump said the action would only last for a matter of weeks, and this is the baseline many economists and analysts have stuck with.
Donovan argues that for this reason, markets are “bewitched” by good news, and so are more inclined (such as yesterday) to act: In a matter of moments yesterday, oil sunk below the $100 threshold and was down 15% while equities added $1.7 trillion in value (much of this promptly unwound when Iran denied the talks).
“Investors are also perhaps influenced by loss aversion and confirmation bias,” added Donovan. “Investors want the war to end, there’s an irrational bias in favor of rising markets. If there is a story that seems to confirm that desire, investors are more likely to react to it. This does not mean that negative stories will be ignored … for now, markets do seem to be content to trade strongly on stories but to provoke an equal negative reaction would probably need more hard evidence of adverse developments.”
Deutsche Bank’s Jim Reid echoed that markets will now be looking for follow-through from Trump 2.0, writing this morning: “Obviously, much now depends on the progress of any talks, and whether the more optimistic rhetoric is followed up by concrete action.”
