Monday Digest
Posted 20 April 2026
Getting back on track
Last week ended with what can only be described as market euphoria, after Iran declared the Strait of Hormuz “completely open”. Markets effectively decided the war to be over (even before Iran’s declaration), with the exception of oil perhaps: one-year Brent crude futures still traded above $75pb, implying longer inflation and a bigger growth hit than markets are pricing in. Even that assumed that de-escalation continued. Many rightly remained sceptical and sure enough, the conflicts re-escalation over the weekend quickly reversed most of the oil price decline.
The recovery from last year’s “Liberation Day” proved the risk of investors getting too negative, which helps explain current positivity, as do improving liquidity conditions with the Fed now a net bond purchaser. If the war had happened when liquidity was tight last Autumn, market reaction would have been worse. Liquidity is improving too: both the dollar and short-term yields fell. It’s no surprise that market sentiment on Iran shifted after central banks dialled back their hawkish rhetoric.
Liquidity allows investors to focus on the positives, and there’s plenty. US Q1 earnings look good, proving that consumers are still spending. The US economy in aggregate is insulated from higher energy prices, as they result in an internal money flow to US oil producers, rather than an outflow. UK growth (from before the Iran war) came in higher than expected, showing Britain started the war in a decent place.
It’s a little odd that during Friday’s euphoria the dollar dropped, and the renminbi gained, despite strong US growth and sluggish Chinese growth. Energy relief helped the euro gain, but we suspect Viktor Orbán’s loss in Hungary played a role too. The departure of the EU’s saboteur-in-chief mean less disruptive European politics. Markets think the same for the world.
Strong bank earnings show no credit contagion
US banks posted strong earnings growth in Q1 2026 (Morgan Stanley +30%, Citigroup +42%, JPMorgan +13%). That shows US consumers are spending despite gas price worries. Geopolitical shocks actually boosted trading profits too, helping Morgan Stanley in particular. Executives expressed concerns about inflation and the hit to growth from higher energy prices, though. Wells Fargo highlighted a split in consumer spending, continuing the “K-shaped economy” theme. JPM noted that corporate activity could stall thanks to geopolitical uncertainty. Bank stocks rallied on the strong results – but actually underperformed non-financials last week.
That’s partly because of the private credit (PC) elephant in the room. Fears of 2008-style contagion have grown after PC funds halted redemptions. The FT wrote last month that distorted EBITDA metrics might be making PC leverage ratios look better than they are – and some fear that firms might be hiding debts off balance sheet altogether. But the bank reports all said PC isn’t a systemic problem, even the PC-critical JPM boss Jamie Dimon. The PC market is a fraction of public debt markets, and the loans are structured so that PC firms and investors take the hit, rather than banks.
We’ve long argued that PC’s inability to create money, like banks can, prevents it causing another 2008. PC losses hurt PC investors, but the house of cards only comes down when bank money, backed by deposits, gets destroyed. Of course, banks have lent to PC firms (JPM’s exposure is $50bn, Wells Fargo $36.2bn, Citi $22bn) but these exposures are structured so that PC firms take the hit, and banks only lose if defaults spiral. Banks have also increased loan loss provisions – a healthy sign of money being stored away to protect against systemic issues. It’s not all fine in PC, but nothing in the latest reports vindicates the doomsayers.
Iran war a problem for food prices
The Iran war is pushing up food prices, according to the UN Food and Agriculture Organization (FAO). Global food prices rose 2.4% in March, with higher energy prices impacting all subcategories of the FAO’s index. Food prices declined in late 2025, and we started this year with decent supplies. That’s why soft commodity futures haven’t reacted as sharply to the Iran war as oil or gas. If Iran declaring the Strait of Hormuz “completely open” is really the end, there should be enough food supplies to last until production returns to normal. If talks fail and the Strait shuts again, though, time will not be on our side.
The biggest problem is fertiliser, 30% of which transits through the Strait of Hormuz. Fertiliser prices were already high before the war and have shot up, blindsiding farmers ahead of the spring planting season. Even if the Strait stays open, it will take months for production and shipping to return to normal levels – keeping food inflation high until next year at least. The UN has warned about potential humanitarian crises from this, particularly in sub-Saharan Africa, which imports 90% of its fertiliser.
Higher food prices will hurt consumers but are unlikely to create a wage-price spiral (given recent labour market softness). Currently, businesses want to pass on higher costs but are struggling to do so and that’s probably why markets aren’t as worried about food as about energy. Supposedly ‘one-off’ price shocks did create an inflation spiral after the pandemic, but that was exacerbated by central bank easing. In contrast, monetary policy has remained restrictive in 2026, and central banks seem to be warning governments against spending through the cost shock. This is why markets aren’t worried – but that’s no comfort to consumers. They desperately need the Strait of Hormuz to stay open.