Oil prices and interest rates rose simultaneously, but US stocks still believe in TACO.

With oil prices breaking through $100 and the Federal Reserve initiating interest rate hikes, Wall Street is still betting that Trump will back down again. This trading strategy, known as "TACO," is facing its most severe test since its inception.

The conflict between the United States and Iran has lasted for nearly seven months, tensions in the Strait of Hormuz and the Red Sea continue to escalate, West Texas Intermediate crude oil prices are hovering around $100 per barrel, the Federal Reserve has raised interest rates for the first time in three years, and the yield on 10-year U.S. Treasury bonds is approaching the key level of 4.946%.

According to Xinhua News Agency, several US media outlets reported on the 17th that despite the ongoing conflict between the US and Iran, the US government has agreed to allow Iranian leaders to attend next week's high-level meeting of the UN General Assembly in New York. Trump stated on Wednesday that he hoped the war was "about to end" and claimed to have communicated "directly" with Iran, a statement that initially caused oil prices to fall. However, the real question for the market is: if Trump does not back down this time, how will the TACO trade end?

Andrew Bishop, research director at geopolitical consultancy Signum Global, said the firm's "Tac-Hormoz TACO Index," which tracks de-escalation signals between the US and Iran, is still flashing warning signs, but private negotiations may already be underway. Kathleen Brooks, research director at XTB, pointed out that once the US and Iran reach an agreement, oil prices could fall rapidly, the bond market could rebound and yields could decline, providing significant support for the stock market.

TACO Trading: From Joke to Market Dominant

"TACO" is an abbreviation for "Trump Always Chickens Out," originally coined jokingly by a columnist for the Financial Times, but it has now evolved into a trading force that cannot be ignored on Wall Street.

The underlying logic of this strategy is Trump's high sensitivity to the performance of financial markets. He has always viewed stock market trends as a barometer of his governance effectiveness, and the market generally believes that he is particularly wary of market turmoil that could impact the Republican Party's prospects in the midterm elections.

The landmark moment for the TACO trade occurred on April 9, 2025—Trump announced a 90-day suspension of reciprocal tariffs on most trading partners, timely halting a sell-off that was pushing major stock indices to the brink of a bear market. Since then, whenever the market has been under pressure, investors have tended to buy on dips, betting that Trump will turn around again.

Signum Global has built a mathematical model based on this information to predict the timing of Trump's policy shifts. This model successfully predicted a de-escalation signal in July of this year—a brief truce between Washington and Tehran as delegations from both sides traveled to Qatar for indirect negotiations. However, disputes surrounding alternative shipping routes and alleged U.S. bypassing of certain routes subsequently escalated tensions again.

Stock market resilience weakens Trump's incentive to back down

The core premise of the TACO deal was that a stock market downturn would force Trump to seek reconciliation. But currently, this transmission mechanism is weakening.

The Federal Reserve announced an interest rate hike on Wednesday, causing U.S. stocks to record their worst single-day performance in three months, but they quickly stabilized and rebounded. The Dow Jones Industrial Average has fallen 2.6% this month, while the S&P 500 and Nasdaq Composite have fallen by only 0.6% and 0.1%, respectively.

This presents a thorny paradox: precisely because the stock market hasn't suffered a significant drop, the pressure on Trump to push for peace talks has correspondingly eased. According to MarketWatch, some market participants worry that the stock market's relative resilience might actually lead Trump to adopt a tougher stance on Iran.

Brooks stated that traders have gradually abandoned their bets on Trump's latest concessions. "With the ongoing escalation of tensions and attacks in the Strait of Hormuz and the Red Sea, market expectations for TACO are waning."

The bond market is the real pressure valve.

With the stock market showing resilience, the bond market has become a more critical indicator for observing the shift in Trump's policies.

The yield on 10-year U.S. Treasury bonds has climbed to 4.946%, approaching a key threshold widely seen as a trigger for a stock market correction. Bishop points out that historically, Treasury yields at this level have often triggered stock market adjustments.

The impact of rising yields extends far beyond the stock market. Higher interest rates directly increase government borrowing costs, while also raising mortgage, auto loan, and credit card rates for American households, making it increasingly difficult to deliver on Trump's "affordability" agenda, which he has been pushing hard during his second term.

Meanwhile, American consumers are currently spending an average of $4.40 per gallon of gasoline. High gas prices have historically been a political burden for the ruling party in elections, and the Republican Party is facing mounting public pressure ahead of the midterm elections.

Negotiations may be proceeding behind the scenes.

Despite the pessimistic market sentiment, Signum Global believes that the downgrade process may have already begun quietly beneath the surface.

"People often forget that the exact start time of each previous round of downgrades was only clarified after the private negotiations became public," Andrew Bishop told MarketWatch. He added that although the meeting between Gulf and Iranian leaders, originally scheduled for Monday in Oman, has been postponed, he understands that negotiations are still ongoing and "making progress."

"Hopefully we're nearing the end of the war. They want a deal, and we'll see," Trump told reporters Wednesday evening. He also said he had communicated "directly" with Tehran, but did not provide details. This statement, coupled with news that Saudi Arabia is seeking to restore about half of the capacity of the transnational oil pipeline disrupted by Houthi attacks, pushed oil prices lower on Thursday.

For investors, the core contradiction in the current situation lies in the fact that the market pressures upon which the TACO deal was built have not yet fully accumulated, while geopolitical risks continue to build. This time, Wall Street's patience may be less likely to be rewarded than ever before.

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