Forget the TACO – Wall Street traders already have a new acronym: NACHO.
The abbreviation “Not A Chance Hormuz Opens” has become commonplace in trading rooms and reflects growing skepticism that the US president’s repeated statements about opening the central shipping lane will lead to a quick solution.
● Get to know the acronyms that are stirring up Wall Street
Xavier Wong from eToro told CNBC that the market is losing hope for a solution to the crisis, “Every headline about a ceasefire led to sharp drops in oil prices, with traders repeatedly pricing in a solution that didn’t come.” Now, “NACHO” reflects recognition that high oil prices are not a temporary shock, but the current market environment.
Tensions continue in the area as well: just last night the US and Iran exchanged fire in the Straits of Hormuz, with each side accusing the other of starting the conflict. The new escalation further undermines the ceasefire agreement, which was already under pressure due to allegations of violations.
Trump, in a conversation with ABC News, tried to reassure and claimed that the ceasefire was still in effect and defined the attacks as a “love strike”. The day before he warned that Iran would be bombed “with a much higher intensity” if it did not agree to a peace agreement.
NACHO INVESTMENTS
The “NACHO trade” reflects a distinct change in positions in the markets, from oil and shipping to inflation hedges and the interest rate market, when more and more investors are beginning to regard the disruptions in the Strait of Hormuz as a permanent component, and not as a temporary geopolitical shock, according to veteran industry sources.
The consequences can be reflected in the positions: the energy sector will benefit from high and continuous oil prices, alongside the strengthening of the shipping and marine insurance sectors that benefit from an increase in risk premiums.
Inflation hedging assets such as commodities and gold are also receiving a headwind, and to some extent banks are also benefiting from a higher interest rate environment. On the other hand, cost-sensitive sectors such as aviation, industry and cyclical consumption are affected, while growth and technology stocks are pressured through the interest rate channel.
In this sense, the transition from TACO to NACHO reflects a deeper change, from a market that believes in a quick solution to a market that begins to price a new and lasting macro reality.
Although the price of oil has fallen from the peak of 126 per barrel at the end of April, it is still more than 38% higher than the levels that preceded the escalation in the Middle East. At the same time, the shipping and insurance markets continue to convey restlessness, even when headlines about a cease-fire occasionally appear.
The risk premiums for passage through Hormuz jumped to a record of about 2.5% of the vessel’s value per voyage in March, compared to only about 0.1% before the war. Even after some decline, premiums are still about eight times higher than pre-crisis levels, evidence that risk insurers are not pricing in an imminent solution.
The possible scenarios
State Street analysts point out that the NACHO trade is being conducted alongside the TACO trade, the old narrative of “Trump Always Chickens Out” surrounding Trump’s tariff policy and confrontations.
They say that despite high energy prices, Wall Street continues to climb to record highs, indicating that two narratives coexist: skepticism about a quick fix and cautious optimism that a deal is still possible.
State Street says that if $100 oil becomes the norm in the coming months, the gold market may struggle to maintain momentum. On the other hand, a sharp drop towards $80 following an agreement and the opening of the strait may actually catapult gold above $5,000 and even towards $5,500 per ounce.
Although the stock markets are showing surprising resilience, analysts point out that optimism is far from shared by everyone. “Overall, the market’s reactions to the energy shock remain relatively orderly,” Vassilios Gakionakis, chief economist and strategist at Aviva Investors, told CNBC.
However, according to him, the interest rate markets are beginning to reflect fears of a prolonged energy shock. “The clearest signal came from the bond markets, where the short part of the curve will be sharply repriced upwards, alongside a significant flattening of most of the yield curves,” he said. He also added that a prolonged closure of the strait would cause “a more persistent inflationary shock”, and at the same time increase the probability of a global economic slowdown.
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