It’s wild to see how markets are running with this much optimism when we haven’t seen any actual progress yet on the Middle East conflict. The fact of the matter remains that the Strait of Hormuz is in de facto closure and set to enter its eighth straight week under such circumstances.
Yet, oil prices have come off the boil by quite a mile with WTI crude hovering around $91.75 currently. Meanwhile, the more indicative “front-month” June contract is trading at around $88.15 on the day. As for Brent crude, it is keeping closer to the $95 level at the moment. However, physical prices are still holding a massive $40 to $50 premium. So, keep that in mind.
As much as markets are optimistic, the situation on the ground hasn’t changed. In Asia, we’re already seeing plenty of economies needing to adjust to the reality with price increases everywhere. And we all know that when prices go up, they never come back down. So even if the energy price surge might prove to be temporary, the impact is more permanent for your every day consumer and business.
In any case, markets are always a different beast and right now the signal is that there is much expectation of good news to come in the coming week at least. That optimistic angle is enough to push major indices in the US to fresh all-time highs this week.
S&P 500 index daily chart
As we get into the second half of the week, here’s where we stand on US-Iran developments today:
- US president Trump says “the war with Iran can be over very soon”, touts “an amazing two days ahead”
- Reports suggest US and Iran are weighing an extension to the ceasefire
- Iran categorically denies extending the ceasefire; no plans for further talks at the moment
- Pakistan tries to mediate the situation with army chief arriving in Tehran to push for second round of talks
The final point is where we stand now, so perhaps we could see talks over the weekend – whether directly or indirectly.
The US demands still remain the same, that being the two key points especially. The first is for Iran to give up its nuclear ambition. And the second is for a full reopening of the Strait of Hormuz.
On the first demand, Iran is still not giving in and that is a major sticking point in negotiations. On the second demand at least, a Reuters report suggests that Iran seems to be open to the idea of allowing a small passage gap closer to Oman. I would figure it would look something like this:
However, Iran’s flexibility on that will still be largely tied to how negotiations play out with the US. So, there’s that.
As we look to the coming two days, it is still all about US-Iran tensions and headline risks for markets.
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