Middle East Ceasefire Agreed – Quick Thoughts

After 6 weeks of conflict, the US and Iran appear to have agreed a ceasefire, which could pave the way to a durable peace deal being agreed, and the war ending, in due course.

The agreement means that, assuming it holds, hostilities will cease for a period of two weeks, during which no military strikes will take place, conditional on the Strait of Hormuz will be re-opened by the Iranians. According to, where else, a Truth Social post from the President, a 10-point proposal has been received which will now form the basis of negotiations towards a more durable peace agreement.

Unsurprisingly, the initial market reaction has been a positive one, albeit perhaps not as sizeable as one might’ve expected, largely owing to the grind higher in risk assets seen since he tail end of Tuesday’s cash session.. As noted on numerous occasions, participants have been desperate for anything resembling good news for some weeks now, and even more desperate to see concrete steps being taken towards de-escalation. Now that we seem able to put a tick in both of those boxes, participants are unsurprisingly willing to significantly take up risk levels once more.

In any case, equity futures have popped higher on news of a ceasefire, while Crude benchmarks have plunged, taking front Brent back beneath $100bbl as participants price out the worst of the supply risks that had been feared.

All this, of course, helps to reinforce the theory that many market participants are operating in a mindset where they seek not to get ‘caught short’. Once more, we’ve endured a period where bad news and negative catalysts have been plentiful, yet all of that has turned on a sixpence as a result of decisions made in the Oval Office. When the probability of a U-turn is so high, it’s difficult to be especially bearish, for especially long, or with especially high conviction, as has been proved time & again during the Trump presidency.

Zooming out, the key consideration now, is what happens next. Clearly, the first area of focus will be ensuring that the agreed ceasefire holds, and that the conflict remains on a path towards de-escalation. Providing that that remains the case, it’s reasonable to assume that equities have probably now put in a bottom, at 6,350 in the front S&P contract, which is unlikely to be tested unless tensions flare up once more.

Beyond that, one will also want evidence of commodity flows through the Strait of Hormuz picking-up from the handful of daily transits that we see today, to the >100 that we saw, on average, pre-conflict. Sticking with commodity flows, close attention must also be paid to the degree of damage that has been done to energy infrastructure in the Gulf, and the timescales for resuming normal operation, particularly at the Ras Laffan LNG terminal. Restoration of typical production levels is just as important as the restoration of safe transit through Hormuz in order to ensure a normalisation in energy prices.

Focus will also now fall heavily on the economic damage that the conflict, as well as the surge in energy prices, has wrought on the global economy, not only from an inflationary perspective, but also growth headwinds which will stem from the subsequent negative demand shock. Providing that energy prices do indeed now begin to normalise, central banks are likely to ‘look through’ the upcoming rise in headline inflation as being temporary in nature, significantly reducing the chances of any policy tightening in the near-term – which, I’d always said was a sign of markets getting ahead of themselves!

Of course, the significant risk here is that the ceasefire doesn’t hold, that we then see a re-escalation in the conflict, and are essentially back to ‘square one’ all over again. Were that to happen, which we of course hope doesn’t come to pass, we at least know the playbook only too well from the last few weeks – higher crude, the dollar as the only safe haven that ‘works’, and everything else from stocks to bonds to metals coming under considerable pressure.