The deal appeared increasingly fragile after Israel on Wednesday staged its largest attack on Hezbollah during this conflict, with Washington and Tehran disagreeing about whether strikes on the Lebanese militant group were meant to be included in the ceasefire agreement. Additionally, Iran attacked Saudi Arabia's East-West Pipeline – its only crude oil export route since the war began – shortly after the ceasefire was agreed.
For markets, the biggest question is what is – or is not – happening in the Strait of Hormuz, the critical artery for the global energy system. Trump had said the ceasefire is contingent on the narrow waterway’s reopening, yet the strait remains effectively closed.
For Tehran, reopening appears to involve charging tolls for transiting ships, a demand that would likely result in higher global energy prices for years to come. This has all led Trump to write on Truth Social: “That is not the agreement we have!”
Further peace talks are still set to go ahead in Islamabad this weekend, despite Iran suggesting they would be “unreasonable” in light of the Israeli strikes in Lebanon and Trump issuing further military threats. Israel has said it would open separate talks with the Lebanese government aimed at ending the war there and disarming Hezbollah.
Markets appear somewhat optimistic about the likelihood that fighting in Iran will not resume soon, with U.S. stock indexes advancing on Thursday and Asian equities rising on Friday, putting them on track for their best week in over three years. Wall Street was flat before the bell on Friday.
However, even if the parties agree on a lasting ceasefire, this will likely only bring partial relief to global energy markets. As a reminder, oil prices are still well above their levels before the conflict broke out, with Brent and WTI up around 34% and 48%, respectively, since the war began on February 28.
What's more, production capacity in the region is still depressed, with Saudi Arabia's oil output down by 600,000 barrels per day and throughput on its East-West Pipeline by about 700,000 bpd, according to government sources.
While exporters in the Middle East could soon begin shipping oil trapped in the Gulf if the Strait of Hormuz is reopened, hopes of a rapid return to normal flows are almost certainly misplaced. This is particularly worrisome for Asia, where physical energy markets are likely to remain under stress for months even in the most optimistic scenarios.
All of this leaves the Federal Reserve in an increasingly unenviable position as higher global energy prices threaten to exacerbate already elevated inflation – and potentially unanchor inflation expectations – as Americans eye higher prices at the pump.
On that front, this week’s macro releases included U.S. services PMIs that showed rising input costs – an early signal of renewed inflationary pressure – alongside PCE inflation figures that showed an expected uptick in U.S. price increases in February, before the war started.
At a global level, IMF chief Kristalina Georgieva warned again on Monday that “all roads” now point toward higher prices and slower growth, a message unlikely to comfort policymakers wary of the spectre of stagflation.
Federal Reserve minutes released on Wednesday suggested more officials are leaning toward a rate hike in response to inflation risks, though most continue to see rate cuts as the base case later this year, with scope for deeper easing should the conflict begin to weigh on U.S. employment.
Both policymakers and investors will thus be eagerly awaiting today’s release of consumer price index (CPI) data for March, as investors shift their attention away from the battlefield – at least for now.
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