The long weekend saw a flurry of is-it-open-or-is-it-closed headlines with regard to the Strait of Hormuz, but the bottom line, for markets, is that the U.S. and Iran are still talking and oil tankers are starting to move out of that restricted waterway.

Besides Iran, one of the other unresolved issues for markets is whether the Federal Reserve under Kevin Warsh has taken a new hawkish turn or just employing more hawkish language. Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, said the uncertain outlooks concerning the Fed and the Middle East were the big talking points among Canadian-based investors in U.S. stocks she spoke to last week.

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The stock-market strategists at Morgan Stanley, led by Mike Wilson, say things are playing out just as they expected back when President Donald Trump first announced the Warsh nomination. “We viewed the selection of Warsh as the right choice to fortify market credibility for the Fed, a critical element for the eventual success of the administration’s plan to grow out of the debt problem,” said the strategists.

Wilson and team argue the subsequent move in the ratio of the S&P 500 SPX to gold GC00, wider by 40% since Warsh was nominated, supported their analysis. “In short, the Warsh nomination was the right choice if the goal is to fortify some questioned credibility for policy makers as evidenced by the moves in precious metals earlier this year and over the past decade,” they said. Warsh’s press conference on Wednesday — criticizing his colleagues for having missed the Fed’s inflation target over the last five years — suggests, according to the Morgan Stanley team, that “there is a new sheriff in town that will enforce that mandate.”

Granted, Warsh also suggested that the Fed’s inflation target is due to be amended, with his comment that he tends to focus on the left side of the decimal point, though he said “for now” the central bank’s inflation target is still 2%. The Morgan Stanley strategists say the comment means Warsh is aware of the need to run the economy “hot to some extent” to manage the debt problem in the long term.

But now, they say, comes the hard part. Warsh didn’t comment much about the balance sheet — its future use is the subject of one of his five task forces — but the strategists highlight that the rate of change on the balance sheet has rolled over. The Fed reduced the size of its reserve-management program from $40 billion per month to $10 billion, at the same time Treasury buybacks have been curtailed by about 50%. On top of that, lending growth is accelerating.

“Net-net, we believe the path on liquidity is already tightening and think it is unlikely to reverse in the absence of funding market stress, higher bond volatility or credit market disruption. In other words, liquidity remains the greater risk to equity markets in the short-term rather than any fears about the Fed raising rates to fight inflation,” Wilson and team say.

This liquidity drying up will interact with the rate of upward earnings revisions slowing down. And that could mean the market testing Warsh’s new commitment, possibly over the next few weeks, to take short-term pain to achieve longer-term goals, the strategists warn.

U.S. stock-market futures ES00 NQ00 were mixed. Asian stocks rallied, buoyed by tech stocks in Japan and Taiwan. Treasury yields BX:TMUBMUSD10Y rose. Oil futures CL00 fell.

Key asset performance

Last

5d

1m

YTD

1y

S&P 500

7500.58

1.44%

0.74%

9.57%

25.41%

Nasdaq Composite

26,517.93

2.74%

0.86%

14.09%

35.67%

10-year Treasury

4.49

0.10

-7.30

31.80

10.70

Gold

4226.8

-2.41%

-6.29%

-2.43%

24.89%

Oil

75.13

-7.43%

-22.55%

30.87%

11.77%

Data: MarketWatch. Treasury yields change expressed in basis points

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Here were the most active stock-market tickers on MarketWatch as of 5 a.m. Eastern.

Ticker

Security name

SPCX

Space Exploration Technologies Corp.

NVDA

Nvidia

MU

Micron Technology

TSLA

Tesla

TSM

Taiwan Semiconductor Manufacturing Co.

INTC

Intel

AMD

Advanced Micro Devices

MSFT

Microsoft

GME

GameStop

INFY

Infosys

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