What are the TACO trades?

Trading is 90% preparation and 10% execution so let’s spend some time preparing for an end to war. The market is clearly optimistic today but that could just be an unwind of fears of weekend escalation. There are so many moving parts here and iterations of how it could end but let’s make one simple assumption: The free flow of oil through Hormuz is re-established. Whether that’s a Trump TACO or Iran capitulation is largely irrelevant in terms of most market moves.

So let’s say the oil gets moving again and the headline hits. What are the trades you want to think about?

1) Short oil

This is the obvious one and it’s the big one. It’s the torque on any kind of post-war trade and the clearest expression of war trades. May WTI is down $4.23 to $92.75 today and it was in the low $60s before the war. The barrels are now missing and can’t be recreated so we won’t go back to pre-war levels but if there’s a quick end, the move could be dramatically lower as oil longs are squeezed. How far oil falls will depend on the details of any peace and it’s hard to imagine a perfect switch being flipped.

2) Oil offshoots

It goes without saying that oil companies would lose some value with oil but some of the things to look at on the long side are things that are punished by high oil prices: airlines, transports, some consumer-sensitive stocks. One that jumps out at me are cruise ships. They’ve been hit hard during this war but fuel costs are 2-4% of spending and a small portion of the ticket that’s easily recovered. The hit to consumer spending is probably the bigger reason for the drop but it already looks overdone. I don’t love the chart of Carnival but it’s an interesting one to put on your radar because there’s a demographic tailwind from Boomer retirement and spending.

3) Disinflation and rate cuts

The second order effect of lower oil is that the Fed may be in a position to cut rates again. If you ignore the oil moves and Iran war, the biggest economic news this month was the soft US non-farm payrolls report. If the next trade is a soft US economy or disinflation, then pricing in rate cuts is a great trade. Fed fund futures would be the clearest expression of that but short-dated bonds and stocks in general would benefit. There’s a risk of getting too cute here because there are still private credit and AI worries (maybe more than ever) so be mindful of that. The ‘peace trade’ will last a few days at most outside of oil.

4) Global stocks

Japan and Germany are the first two places that come to mind. Both are energy starved and in a particularly bad place due to the war. Until the war, the market had been in love with the Nikkei 225 and the DAX. If there is a sense of enduring energy stability, I don’t see why those trades wouldn’t work again.

5) Short USD

I take this as one of the most-straightforward war trades. Similar to the DAX and Nikkei, the euro and the yen would be obvious beneficiaries to lower oil prices and stabilized trade. The dollar has rallied about 4% since the start of the war and that would slowly come out.

6) Gold

The trade on gold isn’t obvious so I don’t particularly see it as a headline mover. If you told me ‘war over’ I’d be more inclined to sell gold but it would be far down the list of trades I would be looking at. The details really matter here. If the US walks away from Iran and the Hormuz and tells Europe/Asia to clean it up, that would be decisively positive for gold. It would mark a retreat of the dollar-based system. If Iran capitulates and the US builds a base there, then it would instead highlight dollar hedgemony. But as the dust settles on any outcome, I