Key takeaways
- The agreed ceasefire and reopening of Hormuz have reduced immediate market stress, but the new two-week deadline means volatility is likely to remain elevated.
- Energy is still the key variable. The oil price has fallen sharply, but remains well above pre-conflict levels, and a merely partial restoration of flows may keep inflation risks alive.
- Asia and Europe remain more exposed than the relatively insulated US. Consensus growth estimates have already adjusted lower, reflecting elevated gas prices in particular.
- With risks subsiding, our stance has become more constructive. The US remains our preferred equity region, while we turn more constructive on selected cyclical sectors. We also recommend European IG credit and gold.
What happened?
In a dramatic turn of events, just hours before US President Donald Trump’s deadline expired, both the US and Iran agreed to a two-week ceasefire, aiming to negotiate a sustainable peace agreement. Israel has also joined the ceasefire, though it specified that the arrangement does not extend to Lebanon. The most significant development for the financial markets is Iran’s commitment to reopen the Strait of Hormuz, which has effectively been closed for 40 days. This critical concession allows oil and gas tankers to resume shipping, promising the restoration of vital energy flows from the Middle East.
The announcement of the ceasefire and the reopening of the Strait triggered an immediate response in global markets. Oil prices dropped sharply, with Brent and WTI crude prices falling by approximately 15%, reflecting renewed optimism about Middle Eastern oil supplies. Equity markets responded with a surge in risk appetite, as previously hard-hit sectors led a broader rebound. Japan’s Nikkei index climbed by 5%, South Korea’s KOSPI soared by 6%, and the EuroStoxx50 advanced more than 4%. S&P 500 futures also rose, pushing the index within 3% of its all-time high. In the bond markets, sovereign yields declined, and the USD weakened against the EUR, further underscoring the shift in investor sentiment towards riskier assets.
What does it mean for investors?
The ceasefire is a meaningful step toward a durable end to the crisis, reducing immediate tail risks. Nevertheless, it is too early to assume a solution has been achieved. A new two-week deadline now frames the next phase and, as it nears, markets are likely to turn more headline driven. With US and Iranian positions still some distance apart, volatility should stay elevated as investors reprice incoming negotiation signals.
For the macro outlook, the decisive variable is how quickly energy flows through the Strait of Hormuz can normalise. Before the conflict, roughly 20mbbl/d of oil transited the Strait. Reports of infrastructure damage and lingering safety concerns suggest flows may not be fully restored during the second quarter.
Market pricing reflects this residual risk. Oil remains up around 50% YTD (Brent) and roughly 30% above pre-conflict levels, while the futures curve implies Brent above USD70/bbl through the rest of the year. The conflict has already weighed on global economic activity, with the burden falling disproportionately on regions that are dependent on energy imports. Asia is the most affected, followed by Europe, while the US should incur the least damage. For Europe, gas matters more than oil; with TTF futures broadly stable at elevated levels for the remainder of the year, the drag on activity may persist.
Central banks face a difficult trade-off between curbing higher prices and supporting growth. Markets have already pared back expectations for ECB tightening in 2026 – from 3 hikes to 2 (of 25bps each) – while less than half a Fed cut (9bps) is priced.
In terms of positioning, we modestly tilt more risk-on. We remain largely neutral on equities but turn more constructive on cyclicals – industrials, IT and banks – while maintaining a preference for utilities, supported by enduring energy security priorities and the power-intensive expansion of AI. Regionally, we keep a US bias into the earnings season and remain cautious on Europe until energy visibility improves. In fixed income, we reiterate our preference for the high-quality exposure provided by the European investment grade credit. Finally, we see scope for gold to rebound as USD and yield headwinds fade, with positioning less crowded than earlier in the year.
