Please see the below article from Tatton Investment Management discussing market reactions to the Iran ceasefire alongside risks from energy prices, AI supply chains and US fiscal policy, received this morning – 13/04/2026.
Brief relief
Markets burst up on the ceasefire news but that optimism, yet again, has had to be tempered. The Strait of Hormuz now are not only closed but “blockaded, perhaps a risky attempt to create more pressure on China to press Iran for a deal. Meanwhile, even if Iran does make concessions, Israel’s leadership seems to prefer further action. Vice-President Vance said there had been a “legitimate misunderstanding” over whether or not the ceasefire included Lebanon, pointing to a split between the US and Israel.
There’s a disconnect between markets’ relief and the real-world scramble for resources. Spot dated crude oil prices for June are nearly 40% above current near-contract futures, reflecting an extreme supply crunch. Even if the ceasefire holds, the war has already raised fuel prices enough for US CPI to show a 0.9% rise in March and it will affect broader prices from April onwards.
Still, markets have been optimistic throughout, and have shown remarkably little downside as Monday starts. Stocks have not entered full bearish territory and there has been little impact on credit spreads. Looking at the US economy, that’s understandable. There’s no sign of labour market stress and no real sign of companies suffering from the war – exemplified by accelerating corporate earnings growth. That’s brought down equity valuations, given US stocks are roughly where they were last October. With the dollar now strengthening, US stocks look very attractive to international investors.
Higher bond yields make equity valuations a little less attractive – and yields haven’t come down as much as you might expect since the ceasefire. If US growth keeps going strong, yields (and interest rates) could remain high, especially given Trump’s desire to borrow more (see below). The push for defence spending could mean fiscal indiscipline around the world. The UK has tried to maintain discipline with its fiscal rules, but the government’s commitment to those rules will be tested by bruising local elections. There’s still potential for yields to fall, in line with other asset gains. It’s just not a given.
The bond reaction will impact how markets deal with their previous anxieties: AI and private credit. With any luck, we’ll be worrying about the old themes by May.
Pax Silica – NATO for AI
Despite Trump’s misgivings about NATO, his administration is spearheading a NATO-of-sorts for AI. Washington launched Pax Silica in December, grouping allies under an AI supply chain umbrella, securing everything from mining to chips and infrastructure. It took shape after China’s export controls on rare earth metals, but is arguably an overdue response to Beijing’s Belt and Road Initiative (BRI). Around 150 countries have signed BRI agreements with Beijing since 2013, helping China dominate the rare earth sector. Trump would never admit it, but Pax Silica also builds on Biden’s CHIPS Act, encouraging US chip manufacturing (like TSMC’s “gigafab” in Arizona).
Washington is playing catchup in securing supply chains against China. It’s not just rare earths; China beats the US in several AI areas, according to ASPI. Taiwan is (unofficially) part of Pax Silica due to chipmaking giant TSMC, but reliance on Taiwan isn’t a great way of China-proofing your supply chain. Indeed, Taiwan has a strong incentive to delay TSMC’s cutting-edge production in Arizona, or else risk losing its ‘silicon shield’. Then there’s the fact that no amount of alliance-building can change the fact that so much of the world’s minerals are in Chinese earth.
Perhaps Pax Silica is too little too late, but securing supply chains is always better than not doing so. It shows that important matters of state can carry on, despite Trump’s scorched earth approach to international relations. The most interesting Pax Silica member is India, which, despite its own gripes with China, has never been keen to throw its lot in with the west. One has to wonder how much Pax Silica benefits its non-US members. Supply chain security is good, but Trump’s second term has proven that reliance on the US can be a major vulnerability. That might limit how committed countries are to Pax Silica.
Trump’s budget throws caution to the wind
Axios summarised President Trump’s 2027 budget plans as “all guns, no butter”. The White House wants roughly $500bn in extra defence spending and a cut of around $73bn to non-defence discretional funding (a 10% cut). Clearly, $73bn doesn’t outweigh $500bn, and yet White House proposals imply falling debt-to-GDP by 2026. That’s thanks to the administration’s assumption of 3% annual growth over the next decade. That’s in line with Treasury Secretary Bessent’s “3-3-3” plan, but no one else thinks it’s realistic. The Congressional Budget Office and the Fed both predict US growth under 2%.
The president’s budget is a statement of priorities rather than a policy plan; it’s up to Congress to form and pass those. Frankly, the 3% growth assumption is a fantasy. The only periods of sustained high growth in US history have been associated with population growth – but Trump cracking down on immigration. The plans therefore show the president’s disregard for fiscal constraint.
The Republican party has often given Trump a free pass on the deficit, but that could run out. Presidents tend to lose party influence in their final years, and the cracks are already appearing over the Iran war. We expect more Republicans to challenge Trump over the deficit in the years ahead.
The budget’s fiscal laxity didn’t move US treasury yields at all (they fell, thanks to the Iran ceasefire) showing that markets don’t attach much importance to it. If the budget is substantially changed though, it will likely mean a disruptive budget battle later this year. Strangely, Trump’s proposal assumes treasury yields falling to 3.5% next year – a strong assumption that contradicts the White House’s own assumption about faster growth. This is a risk for US bonds. Bond traders tend to be more forgiving of US indiscipline than other nations, but that will be tested if Trump expands a stretched deficit.
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Marcus Blenkinsop
13th April 2026