By Anna Szymanski
April 10 –
Everything Mike Dolan and the ROI team are excited to read, watch and listen to over the weekend.
From the Editor
Hello Morning Bid readers!
Markets returned from the long holiday weekend anything but rested, as U.S. President Donald Trump threatened civilizational destruction if Iran didn’t reopen the Strait of Hormuz before his deadline on Tuesday. But instead of hellfire came news of a two-week ceasefire, which was initially cheered by markets. The question now is whether that optimism will last as investors consider the wide gap between Washington and Tehran and the damage to energy supply chains caused by this conflict.
No one knows what will happen next, of course, but it seems likely that conditions will be less benign than many traders currently seem to believe.
The eleventh-hour ceasefire announcement late on Tuesday sent both Brent and West Texas Intermediate (WTI) crude prices tumbling from upwards of $110/bbl to under $100 a barrel.
This, in turn, allowed global stocks and bonds to stage a relief rally on Wednesday, as U.S. equity indexes finished sharply higher, Asian markets surged, and Europe’s STOXX 600 logged its best day in over 4 years. Government bonds rallied as well, while the dollar weakened against developed-market peers on hopes of a lasting end to the conflict.
However, cracks quickly emerged in the Pakistan-brokered ceasefire, pushing crude prices back towards $100/bbl on Thursday and stalling the global equity relief rally.
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.
For more data-driven insights on markets and commodities, check out Reuters Open Interest. You can learn:
This weekend, we’re reading…
RON BOUSSO, ROI Energy Columnist: This Foreign Affairs article offers a sharp analysis of China’s view on the Iran war and the growing risk that a volatile U.S. poses to Beijing’s economic and diplomatic interests.
ANDY HOME, ROI Metals Columnist: A new International Energy Agency report is essential reading on rare earths that goes beyond the basics to spotlight an often-overlooked driver: explosive demand for rare earth permanent magnets.
JAMIE MCGEEVER, ROI Markets Columnist: “Shattered Assumptions And The Energy Quandary” is a deep dive by the always interesting Louis-Vincent Gave of Gavekal Research into the place global energy holds in the minds of investors – the risks and rewards, the upsides and downsides.
We’re listening to…
CLYDE RUSSELL, ROI Asia Commodities and Energy Columnist: I appeared on Gulf Intelligence’s Daily Energy Markets Podcast for a great discussion on the Iran war ceasefire, with heaps of scepticism over whether it will hold and result in a lasting deal. We also explored why the real crisis lies in refined fuels, not crude prices.
And we’re watching…
ANNA SZYMANSKI, ROI Editor‑in‑Charge: Why hasn’t the Iran conflict triggered a classic flight to safety? I explored this question on the Reuters Econ World Podcast with host Carmel Crimmins and my ROI colleague Mike Dolan, discussing the recent moves in gold, Treasuries and haven currencies. We ask whether it may be time to rethink the entire concept of a safe haven.
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(By Anna Szymanski)
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