By Kathleen Brooks, research director at XTB
Optimism is building as we move into the weekend. A ceasefire between Iran and Israel has come into effect today, and Donald Trump has suggested that the next round of peace talks between the US and Iran could take place this Sunday. Perhaps the best piece of news has come this lunchtime, the Iranian authorities have said that the Strait of Hormuz is fully open for commercial traffic for the duration of the Lebanon ceasefire, the first time that it has been fully open since the conflict began.
This news is having an immediate impact on markets, stock futures are rallying heavily in the US, the Dow Jones is higher by 1.1% ahead of the market open, futures on the S&P 500 are higher by 0.7% and we expect to see further gains into record territory for US indices this afternoon.
Brent crude is tumbling and is well below the $90 level; it is currently down 11% on the day. This is the biggest development so far during the ceasefire, and it gives hope that the war will end soon, and supply chains will return to some normality. While it will take some time to relieve the back log of tankers travelling through the Strait of Hormuz, and for Gulf commodity supplies to return to normal after damage caused by Iranian drones, this is undoubtedly good news, and it brightens the outlook for the global economy for the rest of this year.
The Iranians have also spelled out what it will take to keep the Strait open: no further attacks on Lebanon. This is the line in the sand for now, and no doubt the international community will focus its attention on ensuring Israel does indeed hold to the terms of the ceasefire and efforts are made to extend it beyond 10 days. Added to this, the US still needs to agree terms of a prolonged peace deal with Iran, but for now, the market is euphoric about the current situation.
Reopening the Strait of Hormuz has major implications for global economies and stocks. 1, It reduces upward pressure on bond yields, and global bond yields are falling sharply. The 10-year UK Gilt yield is down 9bps, French 10-year yields are lower by 10bps and US Treasury yields are also lower by 8 bps. 2, interest rate expectations will also be recalibrated, and we expect to see a rapid pricing out of rate hikes from the BOE and the ECB. The BOE was expected to hike rates once before September, while nearly two rate hikes was priced in for the ECB this year. 3, This dramatically improves the economic outlook for the UK, which is susceptible to energy price spikes and inflation threats, and the news on Friday already makes the IMF’s latest global growth forecasts look out of date.
Of course there are risks that could see the Strait close once more, but we think now that Iran has reopened the Strait then the chance of them closing it again is minimal, as they also need their oil to flow through the Strait to boost revenues.
The good news continues to build, which is providing a sense of upward momentum for risky assets as we end the week. For stock and bond market bulls around the world, this is the perfect end to the week.
There is one laggard, Netflix. It has little exposure to events in the Middle East, and the stocks is still tumbling in the pre-market and is down nearly 10% after last night’s earnings report. The Dow Jones is set to lead US stocks higher today, as cyclicals swing back into fashion, and oil majors like BP are sinking, the UK oil major is down nearly 5% on Friday afternoon.
Chart 1: Brent crude oil
Source: XTB
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