Fed hawkishness and stretched valuations offset Iran deal relief, Deutsche Bank says

• US 10-year real yields hit 2.22% following the Fed decision, the highest in over a year, while Germany's real yield reached a five-month high of 0.89%
• The S&P 500's 16% rally over April-May represents a historically powerful move not seen since WWII except in post-recession periods or before the 1987 Black Monday crash, with CAPE valuations now at their highest since the 2000 dot-com bubble
• Despite the Iran deal, Brent crude remains roughly 30% above January levels and tanker traffic through the Strait of Hormuz (which carried 20-25% of global oil pre-conflict) remains a fraction of pre-crisis volumes

Summary

Key Development: Despite an interim US-Iran deal and falling oil prices, risk assets have shown minimal movement, with the S&P 500 remaining below its early June record high and credit spreads widening.

Market Dynamics: Deutsche Bank analyst Henry Allen identifies four offsetting forces:

1. Fed Hawkishness: The Federal Reserve's hawkish pivot pushed US 10-year real yields to 2.22% (highest in over a year) and German equivalents to 0.89% (five-month high), counteracting geopolitical relief.

1. Priced-in Expectations: Markets had already anticipated a temporary conflict resolution through oil futures curves, limiting upside when the deal materialized.

1. Stretched Valuations: The S&P 500 rallied 16% over April-May, a move unprecedented since WWII outside post-recession recoveries or the 1987 pre-crash period. The CAPE ratio has reached its highest level since the 2000 dot-com bubble.

1. Supply Constraints: Structural issues persist despite the deal. Tanker traffic through the Strait of Hormuz (previously 20-25% of global oil) remains well below pre-crisis levels, with Brent crude still 30% above January levels.

Outlook: Deutsche Bank suggests markets can absorb Fed hawkishness if driven by positive growth surprises rather than deteriorating fundamentals. The firm notes that modern circuit breakers prevent 1987-style crash dynamics, and the year-to-date S&P 500 gain of 10% is modest compared to the 39% pre-Black Monday rally.

Bottom Line: Geopolitical relief has been neutralized by monetary tightening and elevated valuations, leaving risk assets rangebound despite improved fundamentals.