Fin-X Rapid Response - Stocks rise on 2-week pause in the Middle East

Oil and gas futures prices have dropped by more than -10% following the announcement of a two-week pause in hostilities for negotiations. Bond yields have fallen and stock prices have risen sharply. However, even if successful, months of disruption seem likely, even if the worst-case scenarios appear to have been averted.

• Just 90 minutes before President Trump's 8pm Tuesday (Washington time) deadline was due to expire, he posted on Truth Social that he had agreed to suspend military action for two weeks to allow negotiations to take place with the assistance of Pakistan.

• Israel has reportedly also agreed to pause its military strikes. Israel's Ynet is reporting that the ceasefire also includes Lebanon.

• Despite the president saying that Iran had agreed to a "complete, immediate and safe opening of the Strait of Hormuz", the Iranian response is more nuanced.

• The post from the Iranian Minister of Foreign Affairs stipulated that "For a period of two weeks, safe passage through the Strait of Hormuz will be possible via coordination with Iran's Armed Forces and with due consideration of technical limitations".

• Iran's Supreme National Security Council also said Wednesday it has accepted a two-week ceasefire in the war. Its statement said it would negotiate with the United States in Islamabad beginning Friday, 10th April. "It is emphasised that this does not signify the termination of the war," the statement said. "Our hands remain upon the trigger, and should the slightest error be committed by the enemy, it shall be met with full force."

• The president also said that the Iranian 10-point plan was a "workable basis on which to negotiate" and hopes that a permanent solution will be found.

• The 10 point plan has not been officially published, but Al Jazeera, Xinhua and others summarise the main elements:

  • A permanent end to the war, not just a time‑limited ceasefire.

  • End to all US and Israeli attacks on Iran, plus guarantees against future attacks (security assurances).

  • End to Israeli operations in Lebanon and other regional theatres where Iran‑aligned groups are fighting.

  • Guarantees of “safe navigation” in the Strait of Hormuz, with Iran retaining a sovereign role in overseeing traffic.

  • Lifting of all US and international sanctions on Iran.

  • Reconstruction aid and reparations/compensation for damage inside Iran and in affected neighbouring states.

  • Reopening of the Strait of Hormuz to unhindered shipping if the above conditions are met.

  • A proposed Hormuz transit fee (reported around US$ 2 million per ship), providing Iran with revenue from passage.

• Several energy facilities have reported more permanent damage that will take an extended period to repair. The true impact on capacity is not yet known. Bloomberg has published a graphic illustration reproduced below.

• OPEC+ said it will raise its collective oil output quotas by about +206,000 barrels per day from May, adding to a similar volume agreed in March, commencing this month.

• The decision was framed as continuing the gradual unwinding of earlier voluntary cuts and signalling readiness to increase supply further if market conditions allow.

• S&P/ASX200 8,959 +2.36%, S&P500 future 6,816 +2.4%, Nasdaq future 25,104 +3.0%

• Aus 2yr 4.59% -9bps, Aus 10yr 4.89% -10bps

• US 2yr 3.73% -6bps, US 10yr 4.25% -4bps

• US dollar (DXY) index 98.98 -0.9%, AUDUSD 0.7054 +1.2%, Gold US$/oz 4,805 +2.1%

Fin-X View

• The news has sparked a significant "relief rally" across markets, likely driven by a squeeze of short positions as well as some tactical buying. Futures prices suggest that key American indices will trade back above the 200-day moving average later today.

• While the cessation of military action is undoubtedly positive, there are two critical questions that remain unanswered:

  • How much and for how long will global energy supply be impacted?

  • Will Iran gain control of the Strait of Hormuz as part of the negotiation? Control and the power to levy tolls were not privileges that Iran had before the war, but may be gained to provide the US with an exit. The proposed cost would be approximately US$1 per barrel for ships passing through the Strait.

• The first question is the most important for the remainder of the year. Although crude prices have fallen sharply today, prices suggest that some degree of disruption is likely to persist for several months. For example, the Brent Crude future for delivery in 6 months is still trading at $78.16, +30% higher than the end of December level of $60.19.

• Survey data shows that higher costs have hit supply chains. The increase has yet to show up in official inflation figures but is expected to in some CPI series published later this week, including in the US on Friday, and will likely test market sentiment.

• Central banks are unlikely to cut rates until there is any sign of weakness in the economy. The market is still expecting two more rate rises from the RBA this year, with a 60% cahnce of a May hike.

• Despite the short-term good news, we remain concerned that higher energy costs and tighter monetary policy are not fully priced and may yet reveal more fragilities in weaker parts of the global economy, such as American private credit.

• Some of the impacts may be offset by last year's monetary easing and the OBBBA, but anecdotal evidence points to strains in consumer spending. The upcoming global earnings season is likely to provide some clarification of how the outlook is evolving.

  

  
  

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