More than 100 days after the outbreak of the Middle East war, the US and Iran last week struck a tentative agreement that markets have welcomed as a meaningful step toward resolving the conflict: a 60-day ceasefire extension, the reopening of the Strait of Hormuz and an end to the US naval blockade.
Financial markets rallied on the news, with the Nasdaq Composite leading the S&P 500 higher as crude oil dropped to below $80 (£61) – a level not seen since the conflict began at the end of February.
Yet while this market response is rational – an open Strait removes a significant threat to the consumer and limits further economic harm – investors should be cautious about reading too much into what has been agreed.
As we see it, we are closer to the starting gate than the finish line. Complex negotiations still lie ahead on nuclear materials, sanctions relief and the ongoing management of the Strait itself, and Iran has a long track record of obfuscation and boundary-testing in exactly these kinds of drawn-out processes.
Deal to talk about a deal
The agreement, signed last Friday and styled as a short memorandum of understanding, contains no durable commitments as far as we can tell. Its most tangible steps are the Strait reopening and the removal of the US naval blockade – both of which are meaningful; neither are a resolution.
The nuclear question remains the most critical issue. According to the International Atomic Energy Agency, Iran currently still holds an estimated 440kg – almost 1,000lbs – of highly enriched uranium. Under the Obama administration’s 2015 Joint Comprehensive Plan of Action (JCPOA), Iran was restricted to roughly one-thirtieth of that stockpile.
Translating president Donald Trump’s assurances on the nuclear issue into verifiable, monitored commitments will likely require large teams of experts and sustained diplomatic effort over a long period of time. It is difficult, therefore, to see a comprehensive nuclear deal happening within the next 60 days. The JCPOA took around 18 months to negotiate, and the current Iranian regime is considered more hardline.
The Strait reopening itself will also take time. The extent of mining in the waterway remains unclear and clearance operations – likely involving European navies alongside the US – could occupy much of the ceasefire’s first 30 days. According to some estimates, pre-war shipping levels may not return until late July at the earliest.
“Markets have priced in relief – they have not yet priced in the complexity of what comes next.
Three questions for markets
With a complete deal taking shape, investors should be focused on three important questions:
* Will inflation ease? The direction of global inflation expectations will be among the most important variables to watch in the coming weeks. Last week, new Federal Reserve chairman Kevin Warsh, following his first policy meeting, firmly vowed to restore price stability. The Fed left interest rates unchanged and signalled growing support for rate hikes this year.
A durable reduction in energy prices would ease one of the primary concerns now facing the Fed and its peers – the risk of renewed inflationary pressure, and particularly the risk of higher energy prices seeping into core inflation – potentially softening some of the hawkish tone in recent central bank communications and helping to stabilise global bond yields.
* Will the broadening of equity markets return? The dominant market theme entering the year was the rotation toward the equal-weighted index, value and small and midcap sectors and away from the narrow set of mega-cap technology leaders. Fundamentals across the market-cap spectrum have held up – and we expect to see that narrative re-emerge.
* What does the energy sector look like after this? In the near term, the focus will be on supply recovery – especially with OPEC+ coherence under strain after the UAE’s abrupt exit from the group. We expect Saudi Arabia, and possibly others, to exceed quotas to make up for lost volumes, which is likely to weigh on oil prices.
On the demand side, inventory restocking is likely to be a partial offset. Bigger picture, energy security will be a prevalent theme for the sector, which could spur a capex cycle as countries look to diversify away from the Strait.
On natural gas, the US liquefied natural gas (LNG) sector is a stand-out winner with buyers likely to favour US exports; while pipeline infrastructure companies are in a parallel sweet spot, benefiting from rising gas throughput, both for LNG export and AI-driven power demand.
Pricing relief, not complexity
The relief rally is welcome. Lower energy prices, if sustained, reduce inflationary pressure, support the consumer and the economy, and create conditions in which central banks can keep policy rates stable – a tailwind for equities and fixed income alike.
This is not a resolution, however – it is an agreement to begin the work of reaching one against a backdrop of a hardline Iranian regime, an unresolved nuclear stockpile, a partially mined waterway and a 60-day period in which to make more substantive progress. The critical questions – what nuclear surveillance is permitted, what sanctions relief is granted, how frozen assets are managed and where they ultimately flow – remain open.
Markets have priced in relief – they have not yet priced in the complexity of what comes next. For investors, that gap is where the discipline lies: distinguishing between the structural shifts in energy that are already underway and the near-term price moves that may prove fragile if negotiations stall or the ceasefire frays. We are a-ways from this process being done and taking a victory lap.
Joe Amato is president and CIO – equities at Neuberger Berman
