The market is not very nervous

As I write this, we are only 3 hours away from Trump's ultimatum to Iran: open the Strait or face annihilation. Personally, I can't see the current Iranian government being willing to capitulate. By the same token, I can't see Trump carrying out such a threat. 

Perhaps that is what the market is thinking as well, because there is little in the way of market pricing that suggests investors are very concerned about the consequences of today's upcoming events.

Chart #1

Chart #1 shows the 10-yr history of the Vix index, commonly known as the "fear" index. Technically, it's the implied volatility of equity options. A higher value corresponds to greater fear and also to more expensive option prices. When you're nervous it's sometimes smart to buy options since they can minimize your risk. The more nervous you are, the more you're willing to pay. Today's Vix index is elevated, but hardly to an extreme level such as we have seen in prior episodes of fear. 

Chart #2

Chart #2 shows the level of corporate credit spreads. The higher the spread, the more the market is concerned about the outlook for corporate profits. Spreads have ticked higher in recent weeks, but not by very much. If all you knew was the level of credit spreads, you would see this chart and conclude that the market is not concerned at all about the economic outlook. 

Chart #3

Chart #3 is another way of looking at corporate credit spreads: it's the difference between investment grade and high-yield spreads. This too shows very little concern.

Chart #4

Chart #4 shows the yields on 5-yr Treasury bonds (i.e., nominal yields) and 5-yr TIPS (i.e., real yields), plus (in green) the difference between the two, which is effectively the market's expectation for what the CPI will average over the next 5 years. It's tough to see anything here that is out of the ordinary.

I hope the market is right, and I hope the problems in the Gulf are nearing a peaceful resolution.