Yesterday, oil prices plunged, EGB and JGB yields dropped, the USD eased and global equities reached record highs, after US President Trump said that talks with Iran are “proceeding nicely”, Pakistani mediator Munir said an agreement is “close”, high-ranking Iranian officials travelled to Qatar for talks, and Iranian media reported consensus on many points. However, Trump said he won’t be rushed into a deal, other US officials said that one could take days, and Iranian media stated that talks could yet collapse due to the US stance on several points.
This morning, US CENTCOM said it struck Iranian missile launchers and mine-laying boats in the Strait of Hormuz, albeit calling the move defensive. Iranian media said US and Israeli planes attacked its ships in the Strait, and Hezbollah continued attacks on Israel, eliciting a statement by PM Netanyahu that he will intensify attacks on the group. As a result, equity futures opened lower today, while oil, the USD and UST yields gained (for UST yields, the rise followed a much lower opening as the US was closed for a holiday yesterday).
The comments by the US and Iran are still the most hopeful since the war began. However, the talks could still go in either direction until a deal is inked. Even then, there could be issues with its implementation, energy markets will need months to resume normal operations, and energy prices are unlikely to fall to pre-war levels. Hence, higher inflation will still trigger monetary tightening in most key markets, while global growth will take a hit.
For now, the fall in oil prices since last Friday has priced in the latest good news. From here, risks for the rest of the day are skewed towards further declines, which would pressure govie yields and the USD lower, and equities higher. Uncertainty remains elevated.