Written by A two-week ceasefire has been agreed
At the eleventh hour, an agreement for a two-week ceasefire between the US and Iran was reached, suspending military attacks from all sides. In his statement announcing the truce, US President Trump highlighted that the agreement is conditional on Iran reopening the Strait of Hormuz. While there are no official announcements yet, there are reports that a limited number of ships will be allowed safe passage in coordination with Iranian authorities. This feels like a drop in the ocean compared to the pre-February 28 daily passages but could act as a basis for the next step.
Actually, free passage with Iran retaining control over the Strait of Hormuz, is one of the main points in the 10-point proposal presented by Iran to the US in order to permanently terminate the conflict. On Friday, face-to-face talks are set to begin in Pakistan. The two-week truce period has been broadly welcomed considering the alternative, but, since the first truce historically tends to fail, the period ahead is quite critical.
Meanwhile, Israel has accepted the US-Iran ceasefire but maintains a negative stance towards its Middle Eastern neighbour, with Israeli officials remaining vigilant and potentially using this pause to prepare for the next leg of operations if negotiations fail. Israeli military operations in Lebanon are set to continue.
Significant market reaction
Upon the news about the two-week ceasefire, financial markets reacted strongly, led by oil prices. WTI oil dropped by 16% and it is currently hovering around the $97 level at the time of writing, revealing lingering investor angst about the Strait of Hormuz and thus still pricing in a sizeable risk premium. Should there be further reports about a gradual normalization in ship passages, today’s bearish move in oil could have legs.
On the other hand, the main beneficiary of the current conflict, the US dollar, is massively underwater today. Following the hawkish RBNZ meeting, the kiwi is posting the strongest gains against the dollar today, while both euro/dollar and pound/dollar pairs have jumped. Both rallies have met strong resistance at the 1.1660-1.1683 and 1.3406-1.3421 areas, respectively, populated by their 200-day simple moving average (SMA). Similarly, dollar/yen is posting its strongest daily drop since March 19, but still hovering above 158, with investors partially overlooking the strong Japanese cash earnings data published overnight.
Similarly, US Treasury yields have dropped to a one-month low, while gold has risen to the highest level since March 19, with the historically gold-negative risk-on sentiment overshadowed by lower yields and the weaker dollar.
Meanwhile, equities are spearheading today’s recovery, with futures of the major US equity indices quickly climbing above their 200-day SMAs, which tend to signal trend reversals, and significantly reducing the decline posted since February 27.
Ceasefire aftermath in focus
The initial market reaction has been significant, but sentiment will remain driven by headline risk. Any sign that the ceasefire is hanging by a thread can quickly reverse today’s improved risk appetite, with oil prices reacting first.
Interestingly, today’s 10-year US Treasury bond auction could highlight the degree of demand for Treasury bonds at the current lower levels, while tonight’s FOMC minutes have somewhat lost their market-moving potential. That said, it will be interesting to see how close to a rate hike the Fed was on March 18, as markets are currently assigning a 50% probability of a rate cut by year-end.
By XM.com
