There seem to be three themes driving markets today. The combination is a bit scary.

Natural Gas

There are lots of issues surrounding Iran and the U.S.

• While nothing has been done to the Strait of Hormuz that cannot be undone quickly (allowing shipping), it remains closed.
  • There may be a point where naval escorts are provided to encourage shipping, but the disruption hasn’t become enough of a problem for that. More importantly, the U.S. and Israel probably still need to identify and eliminate more potential threats to safe passage.
• The Iranian strikes have looked more effective of late. That is not a high bar, given how little they achieved early in this conflict, but it does raise the level of concern about how long this could last and what the ultimate outcome will be.
• Having said that, it is the disruption of LNG that is the biggest cause for concern to the markets (and to Europe in particular).
  • This spike in natural gas prices is problematic and is a bit surprising. Oil was expected to respond and does continue to increase in price, but the risk to LNG is more disturbing (and not well priced in).

Private Credit Withdrawals

The JPM high yield conference seemed to have assuaged some of the fears around leveraged loans, private credit, BDCs, etc.

Certainly, all of those areas rallied yesterday, in many cases, quite strongly.

Then my entire stream seemed to “blow up” with stories about redemption demands. It looks like Blackstone increased the size of their tender offer for BCRED to 7.9% from 7%. While you could argue that it demonstrates that there is some liquidity, the market (and social media) seemed to fixate on the size of the demand for withdrawals.

If you haven’t read Is Credit Whispering? Or Screaming?, I think it is worth a read.

The AI “Disruption”

This is taking all sorts of shapes and forms. What gets hit by the disruption seems to change almost daily.

I do look at IGV, an “expanded tech-software sector” ETF.

That traded higher nicely on Monday and had its best closing price since February 10^th.

Unfortunately, we are trading back below Friday’s close (at 9:43am EST) on IGV.

Bottom Line

I thought we would bounce and was particularly focused on overstated fears about Iran relative to what was happening.

That situation warrants more concern than it did, as the past 24 hours haven’t gone as well as the first 24 hours.

I thought a “reprieve” in the credit/AI disruption story would last longer and have “more legs” to run.

Any of these things, in and of themselves, would be easy to ignore or bet against having a lasting impact.

The combination of all three occurring at the same time is more difficult to manage.

I would add some risk here, in no small part because the admin may try to take some actions to perk markets up. I’d add to bond positions as the sell-off linked to “inflation fears” is overdone.

On the other hand, will countries in the Middle East, many of whom have big U.S. Treasury holdings, have to reduce their buying to fund additional defense spending? That doesn’t seem like a big deal, but has come up in conversations.

Oil and LNG going higher due to disruption from armed conflict should not influence Fed policy. And if the “disruption” story in AI and credit is back, then the Fed will likely have to cut sooner than later.

It is choppy and I’m surprised the areas under pressure couldn’t sustain more than a one-day rally.

That leads me to believe trading for a bounce here might be okay, but risks being “too cute” as even with a positive resolution in Iran, those lingering “overhangs” will likely move to the forefront and pressure risk assets (including credit spreads).

Again, as per Is Credit Whispering, the risk is spreads rising in areas not directly of concern, not because they really have issues, but relative value and “selling what you can” come into play.

Iran is front and center and dominating the headlines, but the other two factors are playing a significant role, maybe even a larger role in the weakness.

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