Hope springs eternal. And so far this week, markets are running with the optimism that there will be something done when we get to the second round of US-Iran talks. The next round of negotiations are set to take on Thursday, with plenty of upbeat commentary ahead of it. US president Trump is the main man selling the narrative, as he says that the war is “very close to over”. That before adding “I think you’re going to be watching an amazing two days ahead”.
The mood music is a stark contrast from where we were just right off the weekend. As a reminder, that was when talks collapsed and US vice president Vance walked away from negotiations in Islamabad.
Right now, markets are betting that a deal will come sooner rather than later. That’s what we are seeing priced into the oil market and also risk trades in the past two days.
WTI crude has dropped by over 13% since the Monday high, keeping near three-week lows now just above $91. Meanwhile, US stocks have made an impressive turnaround as the AI trade finds renewed life since last week. The S&P 500 is now just 0.5% away from a fresh record high. And the Nasdaq is just 1.6% away from its own record levels. What war again?
And for all the optimism, you’d figure that risk trades will have more legs to run once we get past this whole Middle East episode. That as the focus turns towards how the coming inflation hiccup might just be “transitory”. And if so, major central bank rate hike expectations will pull back further and add more fuel to the risk rally.
But with all that is said and done, it’s still a case of what happens with the Strait of Hormuz next. Markets are eager to move on and put this whole conflict in the rearview mirror. However, the fact remains that nothing will change until something changes on the Strait of Hormuz.
And if Iran continues to also disrupt key energy facilities in the Gulf region, it is not just Asia that will continue to suffer but also Europe.
I would imagine Iran agreeing to some terms on the ceasefire and being less hostile. However, to see them give up their ace in the hole and key leverage is a whole other thing. At most, we can expect Iran to open up some freer passage through the strait but it won’t be the same as it was before surely.
Only time will tell for now.
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