Global markets experienced a tumultuous return from the long holiday weekend, initially cheering a two-week ceasefire agreement between the United States and Iran. Following President Donald Trump’s earlier threats concerning the Strait of Hormuz, the eleventh-hour announcement on Tuesday saw Brent and West Texas Intermediate (WTI) crude prices tumble from above US$110/bbl to under US$100 a barrel. This relief spurred a significant rally across global equities and bonds, with US equity indexes finishing sharply higher, Asian markets surging, and Europe’s STOXX 600 logging its best day in over four years, while the Australian dollar strengthened against its US counterpart.
However, the initial optimism proved short-lived as cracks quickly emerged in the Pakistan-brokered ceasefire. Crude prices rebounded towards US$100/bbl on Thursday, stalling the global equity rally. The deal appeared increasingly fragile after Israel staged its largest attack on Hezbollah during this conflict, and Iran targeted Saudi Arabia’s East-West Pipeline shortly after the ceasefire. Crucially, the Strait of Hormuz, a vital artery for global energy, remains effectively closed despite Trump’s condition for its reopening, with Tehran reportedly demanding tolls for transiting ships.
The ongoing volatility leaves global energy markets far from settled. Oil prices remain well above pre-conflict levels, with Brent and WTI still up around 34% and 48% respectively since the war began on February 28. Production capacity in the region also remains depressed, exacerbating supply concerns. This precarious situation places the Federal Reserve in an unenviable position, as persistently high global energy prices threaten to exacerbate already elevated inflation and potentially unanchor inflation expectations among consumers.
Further peace talks are scheduled in Islamabad despite Iranian suggestions of unreasonableness and additional US military threats. Markets show some optimism that direct fighting in Iran might not resume immediately, with US and Asian equities advancing recently. Nonetheless, policymakers, wary of stagflation, face a challenging outlook. Federal Reserve minutes indicated more officials are leaning towards a rate hike due to inflation risks, though cuts are still seen as a base case later in the year, depending on employment impacts. All eyes will now turn to the upcoming Consumer Price Index (CPI) data for March.
