Weekly Winzer: USA and Iran Reach Agreement

As was announced late Sunday night, the US and Iran have reached an agreement on reopening the Strait of Hormuz and extending the ceasefire. The official signing ceremony is scheduled to take place this Friday in Switzerland.

Good news for the stock markets

Naturally, the news of an agreement in the Iran conflict was well received on the financial markets. As a result, stock markets across the board opened the new week on Monday with solid gains. Oil prices also fell sharply in the wake of reports regarding the imminent reopening of the Strait of Hormuz. The price of North Sea Brent crude fell by about 5 percent on Monday to $83, its lowest level since mid-March. Yields on the bond markets also declined .

The key points of the agreement

Under the terms of the agreement, the Strait of Hormuz is to be reopened in stages while Iranian forces clear mines during the first 30 days. Iran will not charge transit fees during the 60-day period. The US will also lift its naval blockade of Iranian ports. In addition, sanctions on Iranian oil sales are to be lifted, and frozen Iranian funds totaling over $20 billion are to be released.

Of course, a lot could still go wrong. After all, the details have yet to be finalized—even those of the memorandum of understanding have not yet been made public. A permanent peace treaty has not yet been signed, and hardliners on both sides could potentially derail the process in the coming months. Nevertheless, the opening of the Strait of Hormuz is clearly positive news for the markets.

What impact will the agreement have?

The most significant immediate impact of the Iran conflict was stagflationary, as higher energy prices led to a decline in purchasing power. This negative impact from energy prices has now peaked, and the negative effect of higher energy prices on economic growth is now diminishing.

Despite the agreement, it will take months for traffic through the strait to return to normal . This could lead to occasional shortages of crude oil and its derivatives. However, any negative market reaction triggered by this would be only short-lived.

Overall, however, the already favorable environment for riskier asset classes such as stocks is expected to improve further:

• Economic indicators point to a continued favorable growth environment.
• The boom in IT and AI continues. This is evident in the growth in exports, investment, corporate profits, stock prices, and economic growth, as well as in inflation. The positive impact on productivity may not be felt until the future.
• In addition, tail risks have improved. The imminent reopening of the Strait of Hormuz ensures an adequate supply of crude oil to the global economy. The risk of energy price shortages and spikes – and thus of a sharp slowdown in growth – has decreased.
• Because the likelihood of a further rise in inflation has also decreased, the risk of sharp interest rate hikes by central banks has likewise diminished. Such a development would have led to concerns about growth. Growth stocks, particularly those in the AI and sustainable energy technology sectors, should benefit from the reduced expectations of interest rate hikes.

Despite the agreement and its positive effects, the repercussions described last week remain:

• The price of crude oil remains above February’s level.
• Inflation remains elevated(higher energy prices, cost pass-through).
• The decline in purchasing power reduces incomes and, consequently, economic growth.
• Central banks are taking a more restrictive stance than they did in February. Inflation expectations must be kept stable. This has led to broad-based but moderate increases in key interest rates. The ECB’s rate hike last week will likely not be the last.

What are the long-term consequences?

In the long term, the effects could remain visible: The conflict has made it clear that even countries that are not superpowers can exert significant global influence if they control or gain control of a strategic chokepoint.

As a result, supply chains are now considered less reliable than they used to be. This is likely to encourage the building up of stockpiles of raw materials such as oil, gas, and fertilizers, and limit sustained price declines. In addition, pressure is mounting to diversify energy production and imports, for example through renewable energy and the expansion of distribution networks. Overall, the investment boom could broaden – from infrastructure and IT to alternative energy and defense – since even major military powers cannot permanently secure such supplies.

Focus on the Fed’s interest rate meeting

Last week was dominated by geopolitical developments and SpaceX’s initial public offering. This week, in addition to the agreement on the Iran conflict, will be shaped by central bank meetings. Last week, the European Central Bank raised key interest rates for the first time in about three years to keep inflation expectations in check. The stance remained restrictive. However, further rate hikes beyond the level currently priced in are unlikely.

The focus this coming Friday will be on the meeting of the US Federal Reserve. New Chairman Kevin Warsh will lead the FOMC meeting, while former Chair Jerome Powell will also participate in the session. Economic growth is above potential, and inflation is elevated (driven by energy prices, but inflation in the services sector is also above 3%), so there are risks of pass-through. Rising employment growth could also lead to a decline in the unemployment rate. A typically “hawkish” central banker would favor interest rate hikes. The statement, the forecasts, and the subsequent press conference are likely to be interesting. Market expectations are that the Fed’s benchmark interest rate will remain unchanged at a range of 3.5% to 3.75%.

 

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. The language of communication of the sales offices is German and the languages of communication of the Management Company also include English.

The prospectus for UCITS funds (including any amendments) is prepared and published in accordance with the provisions of the InvFG 2011 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in conjunction with the InvFG 2011.

The currently valid versions of the prospectus, the Information for Investors pursuant to § 21 AIFMG, and the key information document can be found on the website www.erste-am.com under “Mandatory publications” and can be obtained free of charge by interested investors at the offices of the Management Company and at the offices of the depositary bank. The exact date of the most recent publication of the prospectus, the languages in which the fund prospectus or the Information for Investors pursuant to Art 21 AIFMG and the key information document are available, and any other locations where the documents can be obtained are indicated on the website www.erste-am.com. A summary of the investor rights is available in German and English on the website www.erste-am.com/investor-rights and can also be obtained from the Management Company.

The Management Company can decide to suspend the provisions it has taken for the sale of unit certificates in other countries in accordance with the regulatory requirements.

Note: You are about to purchase a product that may be difficult to understand. We recommend that you read the indicated fund documents before making an investment decision. In addition to the locations listed above, you can obtain these documents free of charge at the offices of the referring Sparkassen bank and the offices of Erste Bank der oesterreichischen Sparkassen AG. You can also access these documents electronically at www.erste-am.com.

Our analyses and conclusions are general in nature and do not take into account the individual characteristics of our investors in terms of earnings, taxation, experience and knowledge, investment objective, financial position, capacity for loss, and risk tolerance. Past performance is not a reliable indicator of the future performance of a fund.

Please note: Investments in securities entail risks in addition to the opportunities presented here. The value of units and their earnings can rise and fall. Changes in exchange rates can also have a positive or negative effect on the value of an investment. For this reason, you may receive less than your originally invested amount when you redeem your units. Persons who are interested in purchasing units in investment funds are advised to read the current fund prospectus(es) and the Information for Investors pursuant to § 21 AIFMG, especially the risk notices they contain, before making an investment decision. If the fund currency is different than the investor’s home currency, changes in the relevant exchange rate can positively or negatively influence the value of the investment and the amount of the costs associated with the fund in the home currency.

We are not permitted to directly or indirectly offer, sell, transfer, or deliver this financial product to natural or legal persons whose place of residence or domicile is located in a country where this is legally prohibited. In this case, we may not provide any product information, either.

Please consult the corresponding information in the fund prospectus and the Information for Investors pursuant to § 21 AIFMG for restrictions on the sale of the fund to American or Russian citizens.

It is expressly noted that this communication does not provide any investment recommendations, but only expresses our current market assessment. Thus, this communication is not a substitute for investment advice.

This document does not represent a sales activity of the Management Company and therefore may not be construed as an offer for the purchase or sale of financial or investment instruments.

Erste Asset Management GmbH is affiliated with the Erste Bank and austrian Sparkassen banks.

Please also read the “Information about us and our securities services” published by your bank.