The moment the market opened, the "dream" was over

Source: Wall Street Intelligence Circle

Oil prices opened with a gap-up on Monday after Iran responded to a U.S. peace proposal on Sunday night (initial details had not been disclosed), but Trump called it “completely unacceptable” (these six words triggered sharp declines in other markets).

The following are some details disclosed by The Wall Street Journal (but denied by Iranian media). The terms proposed by Iran this time mainly included:

· Concessions that could be made: diluting a portion of highly enriched uranium; temporarily transferring part of the enriched uranium to a third country; allowing limited navigation through the Strait of Hormuz.

· Non-negotiable bottom lines: no dismantling of any nuclear facilities; if negotiations fail, the transferred uranium must be returned; the U.S. must lift oil sanctions; unfreeze Iran's overseas assets; the U.S. must compensate for war losses; and ultimately, the Strait of Hormuz should be primarily managed by Iran.

Iran did not simply answer with a straightforward “accept” or “reject,” but instead proposed a plan that “seems to compromise, but actually preserves its core capabilities.” As we analyzed yesterday—the Iranian principle is at least to “avoid triggering a sharp drop in oil prices.” Iran’s reply to the U.S. proposal is only the start of a new round of negotiations; further declines would reduce their bargaining chips (Iran will not let the market believe the war is already over).

While oil prices fell, gold, U.S. stock futures, and U.S. Treasuries also opened with a gap down, and the 10-year U.S. Treasury yield once again approached 4.4%.

- Unlike before, this time gold and U.S. stock futures did not recover after dropping but instead continued to widen their losses.

- Trump’s comments triggered heavy trading since the market opened this week (panic covering and hedging). The July Brent crude contract saw over 4,000 lots trade within the first five minutes after opening. In comparison, the average trading volume in the first few minutes of recent trading days was less than 1,000 lots. The fourfold difference between 4,000 and 1,000 lots indicates that the chips from traders originally holding an “optimistic attitude” were forced to liquidate at the open. A large number of institutional investors saw all their “peaceful trades” overturned by Trump’s “completely unacceptable” comment at Monday's open. Many fund managers, witnessing such a “5-minute reversal of 10 weeks of expectations,” instinctively chose to liquidate at any cost and retreat to cash (U.S. dollars) first.

- When Trump responded, it was obvious he did not consider the impact on financial markets. Before Monday’s close, Trump will likely make another move, either to escalate or de-escalate the situation.

The easiest mistake the market can make is to mistake a “ceasefire” for “peace.” If the market truly realizes this, then a new wave of volatility is just beginning.