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- It has been another week where the headlines have been dominated by news flow surrounding the US-Iran War. Almost a month from the initial ceasefire, hopes for a more permanent cessation of hostilities increased this week, further fuelling the momentum in equity markets while the oil price traded lower, and below $100/barrel at one point.
- The peace plan under discussion between the US and Iran was reported to be a memorandum of understanding which brings a halt to hostilities and establishes a framework for negotiations over Iran’s nuclear programme. Most importantly for financial markets, it would allow for a phased reopening of the Strait of Hormuz.
- Equity market momentum was driven by both hopes for a resolution to the conflict, but also by continued strong corporate earnings reports, particularly from the tech sector. US and South Korean equities have reached all-time highs this week, while equities in Europe, which have struggled against the backdrop of stagflation and energy supply concerns, saw a strong bounce on renewed hopes for a resolution to the uncertainty from the Middle East.
By the numbers
25% – President Trump threatened new 25% tariffs on imported vehicles from the European Union based, per the President’s social media post “on the fact that the European Union is not complying with our fully agreed to trade deal”. The EU-US deal was agreed last July but is yet to be implemented, delayed by the US process over the legality of tariffs and EU frustrations with the US over Greenland.
8.2 million – the amount of refined fuels exported by the US last week, a new record high, driven by demand from Europe and Asia in the absence of supplies from the Middle East. The US shipped over 8.2 million barrels of refined fuels including gasoline, diesel, and jet fuel, an increase of 20% year on year. The Financial Times estimates that the surge in overseas buying will deliver a windfall for US energy companies, who may earn an additional $60 billion of cash flow in 2026 if prices and demand remain elevated. The White House continues to insist it will not impose any restrictions on fuel exports, despite domestic political pressure with average gasoline prices at a four year high of $4.53/gallon.
10% – the temporary tariff level put in place by the US after the Supreme Court back in February ruled the ‘Liberation Day’ tariffs to be illegal. This new tariff, set to expire in July, has now also been declared illegal by the US Court of International Trade. It will remain in place under appeal. The longer-term replacement for Liberation Day tariffs, under Section 301 of the 1974 Trade Act, is due for implementation in the summer once trade investigations have concluded.
Market movers
Since the breakout in the conflict in the Middle East, we’ve seen volatility across government bonds, at times driven by fears over inflation, at others with fears over growth dominating. Bond yields have moved higher overall, with UK gilt yields seeing some of the biggest moves. Much like we’ve seen in the past couple of years with France and Japan, there is a political risk premium attached to UK government bonds. There is perceived instability around the current Labour party leadership, a situation many expect to worsen as the results of the local elections are digested. At the time of writing, initial results suggest heavy losses for the Labour party.
The UK economy is particularly exposed to the energy shock given a lack of inventories and a reliance on imports, and with higher energy prices set to impact inflation interest rates could well be heading higher. The stability of sterling suggests the UK is far from in a crisis, but elevated political risks do appear to be visible in the yields on UK government bonds for now. This may well remain the case until there is more certainty and political stability, with worries over a potential shift to the left under new leadership with higher borrowing under a new Prime Minister and Chancellor meaning that gilts are likely to continue to see more volatility than the UK’s international peers.
The investment lens
The week concludes with renewed market optimism around a US-Iran peace deal. If there’s a feeling of déjà vu, it’s because there was similar optimism a month ago after the initial ceasefire announcement, which was followed by high level talks. One month later, with energy prices still elevated, and supply concerns building, we are once again seeing hopes raised that a conclusion is in sight. We await confirmation from the Iranian side, but a ‘deal’ that solves the key issue for financial markets and the global economy – the Strait of Hormuz – will be welcomed, even if the more difficult issues around nuclear programmes are unresolved.
President Trump has previously talked up ‘progress’, seemingly front running ongoing talks, only for Iran to push back. Iran has reasons to hold out for the best possible deal, provided it can tolerate the economic pain of restrictions on its oil exports. Will it be different this time? The timeline for easing the supply shock from the closure of the Strait of Hormuz is becoming more pressing given that there are significant supply chain risks looming as a result of the lack of energy flowing from the Gulf. Inventories being drawn down has delayed the impact but the resumption of normal flows from the Middle East remains crucial for supplies to Asia and Europe, and globally in terms of energy pricing.
