Oil prices and interest rates are rising, but there's a worry that because the stock market hasn't fallen out of bed, Trump will be less willing to push for peace
Is there still hope for a "TACO"?
Oil prices are hovering above $100 a barrel. The House has voted three times to end U.S. involvement in Iran. And investors who spent almost the entire spring buying every dip on the assumption that President Donald Trump would start talking peace again are finally starting to ask the uncomfortable question: What if this time he doesn't?
A Wall Street indicator designed to flag potential U.S.-Iran de-escalation was flashing for the first time in months. It was built on the idea by Signum Global that Trump may back off from strikes against Tehran or resume cease-fire talks when oil prices pop and stocks come under pressure.
"It's definitely still flashing," said Andrew Bishop, head of research at Signum Global, a geopolitical advisory firm.
The pattern is known on Wall Street as the "TACO" trade, short for "Trump Always Chickens Out," as markets widely bet that the president is more sensitive than his predecessors to swings in financial markets - particularly those that could potentially impact Republicans' chances of maintaining control of Congress during the upcoming midterm elections.
Trump has a reputation for treating the performance of the stock market as a barometer of his success as president.
That's why Signum Global has created a mathematical model, using Trump's well-known sensitivity to market moves. So far, the index correctly predicted the de-escalation in July, when both Washington and Tehran briefly pulled back and sent delegations to Qatar for indirect talks. But tensions flared back up later in the month after disputes over alternative shipping channels and alleged U.S. bypass moves.
But now the question is: What if nobody comes riding to the rescue this time around? The seemingly nonstop tensions in the Middle East are increasingly becoming a problem not just for financial markets, but also for U.S. consumers, who are now paying an average of $4.40 a gallon to fill up their gas tanks. Higher gas prices could also become a political liability for Republicans in the midterm elections, as voters have historically held the party in power accountable for rising prices and mounting pressure on household finances.
"As tensions and attacks have escalated in the Strait of Hormuz and the Red Sea, traders have given up on a 'TACO' from President Trump," said Kathleen Brooks, research director at XTB. "However, high oil prices could quickly unwind if there is a deal between the U.S. and Iran. This could also cause a recovery in bonds and a drop in yields."
Indeed, a deal in the coming days that ends the fighting in the Middle East could stop an economically damaging global central-bank hiking cycle, which could protect equities, Brooks said. The Federal Reserve on Wednesday hiked interest rates for the first time in over three years to combat persistent inflation brought on by the Iran war, sending stocks to their worst day in three months before recovering some ground on Thursday afternoon.
Trump on Wednesday said he hoped the nearly seven-month war with Iran was about to wind down, but tensions continue to escalate between Saudi Arabia and the Iran-backed Houthis in Yemen.
"Well, hopefully we are toward the end of the war. They want to make a deal, we'll see how that works out," the president told reporters on Wednesday evening. He also said he had spoken with Tehran "directly," without providing further details.
His latest comments helped send oil prices lower on Thursday. Also weighing on crude were reports that Saudi Arabia is seeking to restore about half the capacity of its cross-country oil pipeline after the link was halted following Houthi attacks over the weekend.
The West Texas Intermediate for October delivery was off 1.2% to $101.24 a barrel Thursday, while the Brent crude contract for November delivery fell 0.7% to $104.11 a barrel, according to FactSet data.
"One thing that people forget is that the exact start date of prior rounds of de-escalation only became clear after the fact - once private discussions were made public," Signum Global's Bishop told MarketWatch on Thursday.
"Monday's scheduled meeting of Gulf and Iranian leaders in Oman was postponed, but our understanding is talks are still ongoing, and making progress," he added. In other words, the talks may already be happening behind the scenes, even if there isn't yet a public breakthrough or a clear timeline.
Over the past year, the "TACO" trade has evolved from just a humorous acronym, first popularized by a columnist with the Financial Times, into a major force in markets. It was initially inspired by Trump's decision on April 9, 2025, when he announced a 90-day pause on reciprocal tariff hikes for most U.S. trading partners, abruptly stopping a stock-market sell-off that had pushed the major indexes to the brink of a bear market.
That leaves the ultimate wild card on the table: the bond market. Longer-term Treasury yields have been climbing to critical thresholds, a sign that investors are losing patience about sticky inflation. That matters because rising rates raise the government's own borrowing costs, and push up rates on mortgages, car loans and credit-card debts for U.S. households.
The reason it's relevant to markets is that Treasury yields at this level tend to cause corrections in stocks, Bishop said.
But perhaps more importantly, it makes the "affordability" agenda Trump has staked so much of his second presidency on much harder to deliver.
Comments