The market celebrates ceasefire agreement for two weeks between USA and Iran. Oil falls, stock markets rise, and optimism seems to reign again among investors. However, analysts have called for caution, warning that «the agreement seems fragile» and that there is «the possibility that the situation could worsen again.» Danske Bank experts recall that the ceasefire is, as US President Donald Trump has said, conditional on the reopening of the Strait of Hormuz. Despite this, oil falls sharply this Wednesday, but «this drop in prices is conditional on the resumption of traffic through the strait.» «For prices to stabilize at lower levels, the flow of oil and gas through the strait must recover, something that is not yet clear. The agreement seems fragile, especially because Iran is allowed to charge taxes on ships that transit through it,» these analysts highlight. In addition, they remember that the war is now in its sixth week, and for now «skepticism persists about whether the ceasefire will hold, as many consider it a confidence-building exercise.» «Significant uncertainties remain, and the oil market and markets in general are likely to remain volatile as they closely monitor activity in the Persian Gulf,» the Danish bank’s strategists indicate. In any case, they say, what must be taken into account is that «this result is totally consistent with Trump’s well-known negotiation tactics: maximum pressure followed by a ‘TACO’ style de-escalation.» And «this remains the relevant framework for interpreting future events, also as we approach the expiration of the two-week ceasefire.» From Danske Bank they make it clear that «it is only a ceasefire, and many problems may still arise, but it is undoubtedly a step in the right direction.» For their part, Link Securities strategists comment that with the agreement «for the moment the worst scenario is avoided, which could have led to a worsening of the conflict and its entrenchment over time, something very negative for the world economy which, in this case, could have been doomed to enter a recession.» «Although the possibility that the situation could worsen again – we expect specific peaks of tension in the coming days – given the impulsive nature of the parties involved in the negotiations and the distance that continues to separate them», for the moment investors are celebrating that the worst-case scenario has been avoided and hence the markets are expected to experience «a strong relief rally». In any case, Link experts comment, although oil is falling «we do not believe that, at least for quite some time, it will return to its levels prior to the start of the conflict since both production and distribution will take time to normalize in the Persian Gulf region. This, without a doubt, will have a negative effect on inflation, at least for a few months, a fact that central banks will have to deal with.»
A GIFT FROM PAKISTAN
Stephen Innes, managing partner of SPI Asset Management, speaks for his part of the «gift» that Pakistan has given to the world. «The markets have not found relief on their own; they have been offered it. The change has not come from price determination, but from diplomacy, with Pakistan’s intervention to create a two-week window that has distanced the system from an extreme geopolitical situation,» he points out. The market now appears to be «pricing in the worst-case scenario, in which access through the Strait of Hormuz would be compromised for an extended period.» «The ceasefire does not guarantee stability, but it eliminates the immediate threat of escalation,» and that is enough for there to be some «relief» among investors, he points out. In any case, Innes notes, the underlying structure of the conflict «has not been resolved, it has been postponed.» «The strait is operational, but under coordination. Damage to the infrastructure persists. And the strategic balance has not been completely restored,» recalls this analyst. For now, he notes, «the market has moved away from the edge of the abyss, but it is still close to the edge.» In his opinion, «if negotiations advance and flows normalize, the drop in oil may extend even further and the risk may stabilize. Otherwise, the same mechanisms that promoted this relief measure will operate in reverse.» Michael Brown, senior research strategist at Pepperstone, believes that several things must be kept in mind, given the greater risk appetite shown by the latest market movements. In his opinion, «investors are not only discounting the risk of a short-term escalation, but must also consider the greater probability of reaching a lasting agreement that ends hostilities.» «The main takeaway, in my view, from these market implications, and from Trump’s latest ‘escalation then deescalation’ move overnight, is that it reinforces an idea I keep repeating: that participants are being forced to operate with a mindset that seeks to avoid being caught short.» As he explains, «when the overall picture, no matter how pessimistic it may seem, can change dramatically in an instant due to decisions made in the White House, and the probability of this happening is so high, it is almost impossible to maintain a particularly pessimistic stance, for long or with as much conviction, as has been demonstrated repeatedly during the Trump administration.» And looking ahead, he adds, «investors are likely to focus now on ensuring that the ceasefire holds,» but «they will also be attentive to progress in the upcoming peace talks between the United States and Iran, as well as signs that raw material flows through the Strait of Hormuz are beginning to normalize.» Although, he comments, «there are many unanswered questions about the economic damage that the conflict and rising energy prices have already caused» that «will have to be answered, although not today, as the answer will only become clearer over time.»
