The "impossible triangle" of the HORMUZ STRAIT.

The global market is currently betting on three contradictory propositions simultaneously - risk premiums are at a 20-year low, oil inventories are about to run low, and the reopening of the strait is distant. Bank of America Merrill Lynch warns that this "impossible triangle" means that the market is severely underestimating the risk of demand destruction. According to Wind Trading Platform, in a report released on May 22 by Bank of America Merrill Lynch strategist Sebastian Raedler and others, since the outbreak of the Iran war at the end of February, European stocks have only fallen by 2%, while global stocks have risen by 4% and reached historic highs. The market's calmness is mainly supported by three pillars: moderate oil price increases (benefiting from previous abundant inventory), resilient US macro data (supported by large-scale tax refunds at the beginning of the year), and the AI investment boom driving global profit momentum significantly surpassing the implied levels of macro fundamentals. However, these supports are now beginning to shake. Three propositions, one contradiction The report summarizes the current market pricing as three incompatible propositions, calling it the "Hormuz Impossible Triangle". The first proposition: Financial risk premiums are nearing a 20-year low. Since mid-March, the rebound in asset prices has compressed financial risk premiums back to near the 20-year low point at the beginning of the year. The current European stock risk premium (ERP) is 4.75%, only 25 basis points higher than the recent low point; the US high-yield credit spread is 275 basis points, only 15 basis points higher than the recent low point. Driven mainly by global growth momentum, the current level of risk premiums implies that the market expects global PMI to moderately rebound from the current level, rather than being dragged down by energy supply shocks. The second proposition: Oil inventories will fall to critical low levels. With oil inventories already significantly depleted, "it is crucial to restore the energy flow through the Hormuz Strait as soon as possible to prevent a major economic recession." Many market participants believe that at the current consumption rate, global oil inventories may reach operational pressure levels around June. Once the inventory buffer is depleted, the imbalance between supply and demand can only be adjusted through demand destruction - that is, oil prices continue to rise until demand is suppressed, consistent with the experience of previous energy price shocks. Some investors believe that demand destruction will mainly occur in emerging markets, and the US, as a net energy exporter, can stand alone. However, oil is a globally priced commodity, and demand destruction will affect all economies through higher gasoline prices, further lowering real income growth for US residents. The third proposition: Forecast markets believe that the probability of the strait reopening in the short term is low. According to data from the Kalshi prediction market platform, the probability of the Hormuz Strait reopening by the end of June has dropped from 75% in late April to about 30%, and the probability of reopening by early August is only 40%. Unlike last year's trade war, the current standoff over the Hormuz Strait is a multi-party game - both the US and Iran believe that waiting for the other side to bear more pain first is in their favor, which may prolong the conflict beyond investor expectations. The Iranian regime can sustain its financial operations through limited oil exports, demonstrating the ability to endure. The tension between the three propositions is evident: if the probability of the strait remaining closed as predicted by the market, and inventory buffers are dwindling, then the current pricing of the risk of demand destruction by the market is overly optimistic. Macro resilience is fading Although the market appears calm, macro data is showing differentiation. In the US, labor market, consumption, and capital expenditure data have remained strong so far, but the support effect of large-scale tax refunds at the beginning of the year has faded, and the "real test of the resilience of consumers and the labor market may not have arrived yet." The real wage growth in the US has fallen to recession levels due to inflationary pressures caused by rising energy prices, and it is expected that core PCE inflation in the US will remain slightly above 3% in the coming months. The situation in the euro area is more dire. The eurozone composite PMI new orders index fell to a two-year low of 47.1 in May, and it is expected that the growth rate of private final demand in the eurozone will significantly slow down in the coming quarters. European natural gas prices have been rising since the outbreak of the Iran war, posing additional drag on the eurozone PMI. It is worth noting that global profit momentum is currently significantly surpassing the implied levels of macro fundamentals - the 12-month forward earnings per share change rate for the US is 8%, and for Europe, it is 5%, both the strongest since 2021, driven mainly by the financial, resource, and technology sectors driven by the AI investment boom. However, Bank of America Merrill Lynch expects that with macro pressure transmission, the 12-month forward earnings per share for the Stoxx 600 will decline by about 5% from its current historical high, corresponding to a profit growth rate of -1% in 2026, lower than the market's bottom-up consensus expectations. This article is sourced from "Wall Street News", written by Zhao Ying, GMTEight edited by Li Cheng.