Markets remain sceptical after US-Iran peace pact due to inflation
Concerns about inflation led to a cautious stance among investors, despite a rally in bonds and stocks on Monday following an interim deal between the US and Iran that alleviated some tensions. Market participants cautioned that the economic repercussions of the conflict are still not fully addressed. The MSCI Asia Pacific Index experienced an increase of up to 3.2 percent, whereas Brent crude, 10-Year Treasury yields, and the dollar saw a decline. Strategists at KCM Trade, Pepperstone Group Ltd., and Stifel Nicolaus indicated that the agreement is more likely to present a short-term trading opportunity rather than signal the beginning of a longer-term rally. A sustained drop in oil prices may ease inflation pressures and provide central banks with greater flexibility. However, key issues — including Iran’s nuclear program, sanctions relief, and future operations of the Strait of Hormuz — remain unresolved, leaving uncertainty about whether crude prices will stay low enough to influence the outlook for interest rates. “The big question is how quickly this oil relief translates into lower inflation and whether that opens the door for central banks to take an easier stance on monetary policy,” stated Tim Waterer. “The real test now is the inflationary legacy of this conflict.” Major central banks will soon need to address those questions. The Bank of Japan and Reserve Bank of Australia are set to announce their rate decisions on Tuesday.
Meanwhile, the upcoming meeting of the US Federal Reserve on Wednesday is expected to influence the sentiment surrounding global risk assets. While Brent declined by over 4 percent towards $83 a barrel and stocks surged across Asia, the response in currency markets was comparatively muted. The Dollar Spot Index decreased by 0.3 percent, as emerging-market currencies largely appreciated against the US dollar. Significant implementation risks persist. Despite President Donald Trump’s assertion that the Strait of Hormuz will reopen on Friday, it is important to note that traffic through this crucial waterway will require time to stabilise, and any damage to energy infrastructure may hinder the recovery of supply. Additionally, the agreement has merely postponed the contention surrounding Iran’s nuclear program, allowing negotiators a period of 60 days to achieve a resolution. “It requires the deal to survive Israeli opposition, Iranian hardliners, and the pressure of a 60-day nuclear negotiation. Three sequential conditions, each with a meaningful probability of failure,” stated Dilin Wu. “Markets are pricing the best case. Reality is rarely that clean.”
Uncertainties persist regarding the specifics of the agreement itself. According to Iran’s semi-official Mehr news agency, it has been reported that the commencement of final negotiations is contingent upon the release of half of the nation’s frozen funds, the suspension of oil sanctions, and the lifting of the naval blockade. Tehran has indicated that vessels navigating through the Hormuz Strait would be jointly regulated by Iran and Oman, implying a desire to maintain a degree of control over this crucial maritime route. “We remain somewhat cautious until evidence of a pickup in strait traffic materialises — mine clearance alone could take up to 30 days, and full normalisation of shipping will take longer,” stated Michael Langham. “Inflation expectations across Asia are unlikely to change rapidly.”
During the 60-day negotiation period, Iran is anticipated to advocate for the elimination of both primary and secondary sanctions, a procedure that necessitates endorsement from the US Congress. Tehran has maintained that any ceasefire must encompass Israel’s conflict with Hezbollah in Lebanon. Currently, investors seem inclined to acknowledge the alleviation of the most dire projections; however, much depends on the speed at which energy supply stabilises, inflationary pressures diminish, and the ability of negotiators to transform a temporary agreement into a sustainable resolution. “Oil may dip, lifting consumer and fuel-exposed industries as Gulf producers ramp output and rush tankers through the Strait, but the utter lack of ‘deal’ specifics will keep a geopolitical risk premium in the oil price,” stated Barry Bannister. “Don’t expect a return to sub-$80/barrel to last for long.”
