It’s a testing moment for markets as we await the outcome of talks between the US and Iran. Trump’s message on Monday was a bit out of the blue but the playbook looks to be one that we have seen before. It is a very similar one to how he went about on the trade/tariffs war with China.
The fact of the matter looks to be that we look to be moving on to a new phase of the war. One that likely could see some thawing in tensions and potential for things to de-escalate. As things stand, the key thing to watch for markets remains what will happen with regards to the Strait of Hormuz. And if this latest headline is any indication, there is some hopeful optimism.
Come what may, Iran still holds significant leverage considering their control of the strait. That makes it hard to envisage a major compromise in negotiations. But we’ll just have to wait and see for now.
Overall, broader markets are keeping cautiously optimistic since Monday. That despite the constant back and forth rhetoric of Iran denials and murmurs that talks will not be successful. Wall Street might have eased back yesterday but S&P 500 futures are now up 0.8% on the day again.
The big one to watch remains the oil market. WTI crude oil is falling back under $90 and is keeping near the lows for the week, around the levels after Trump’s bombshell on Monday.
WTI crude oil hourly chart ($/bbl)
If Iran is serious about partially opening up the Strait of Hormuz, that will be good news. It will still likely need time for commercial vessels to trust in the process and slowly get back into the groove. But in all likelihood, we should just see a slow trickle in passage flows rather than a rush back to normality.
And even if the conflict slowly settles down, it might still take weeks or even months for some key energy facilities in the Gulf region to get back on track. Kuwait already warned yesterday that it would take 3 to 4 months to restore production to full capacity even if the war were to end today. So, just keep that in mind.