Signs of easing in the Persian Gulf

There are signs of an easing of tensions in the Iran war. The warring parties, the USA, Israel and Iran, have agreed to a two-week ceasefire. A key condition for the USA was that Tehran agreed to the immediate opening of the Strait of Hormuz. Pakistan has mediated between the parties to the conflict and, according to the US President, Iran has presented an “implementable ten-point peace proposal” that could serve as a basis for negotiations. However, the political hurdles for a lasting solution are high.

Market reaction

The immediate market reaction was textbook: Equity and bond markets rose, while oil prices and the US dollar fell. Market expectations for future key interest rates, which had risen significantly in recent weeks, also fell.

The pattern is typical of an increasing appetite for risk, driven by the hope that one of the most central geopolitical bottlenecks in the global economy will calm down.

Lines of conflict

However, the path to a lasting and resilient peace plan is challenging. On the one hand, the ceasefire has only been agreed for two weeks. On the other hand, the negotiating parties have diametrically opposed opinions on the most important points:

• Control over the Strait of Hormuz
• Iran’s nuclear program
• Iran’s missile program
• The sanctions against Iran
• US military presence in the Gulf region
• Reparation or compensation payments to Iran
• Security guarantees for Iran

These issues affect the geopolitical balance of power in the entire region. The risk of individual issues blocking or delaying the negotiation process is correspondingly increased. Market activity could therefore continue to be driven by the news published: rallies towards détente are just as conceivable as abrupt setbacks.

Even if there is a rapid political breakthrough, the macroeconomic after-effects of the energy price shock will continue to be felt for some time.

In the short term, a ceasefire is likely to lead to a noticeable increase in shipping through the Strait of Hormuz. Nevertheless, even in the favorable case of a negotiated solution, it can be assumed that it will take months for shipping traffic to return to pre-war levels. Logistical bottlenecks, damaged infrastructure, safety requirements and insurance issues will have a delayed effect.

In addition, the energy price increases that have already taken place will generate pass-on effects from the higher energy prices to other products and services. Overall, the effect can be described as significant, but not large.

Type of negotiated settlement

Even if a lasting negotiated solution is reached, the question arises as to whether this will result in a genuine, sustainable peace process. For a stable peace, the negotiating framework would probably need to be broader. In addition to the USA and Iran, Europe, Israel, the other Gulf states and China would have to be involved as key stakeholders. Without such a multilateral approach, the region is likely to remain politically unstable. The long-term risk posed by the region to energy supplies, derived products, global supply chains and assets is unlikely to disappear.

Above all, one conceivable outcome of the negotiations could be that Iran retains control of the Strait of Hormuz. Products that are shipped (crude oil, liquefied natural gas, petrochemical precursors, fertilizers) could remain structurally more expensive than in the past, partly due to higher insurance premiums and possible transit fees that Iran (illegally) levies.

The war in Iran has probably furthered the fragmentation of the world into spheres of influence and the need to become less dependent on bottlenecks. This is because other states or actors could also use the Iranian approach as a blueprint and use geopolitical chokepoints as leverage.

Favorable for assets in the medium term

In the medium term, the decisive factor for the markets is that the energy price-driven, stagflationary impetus of recent weeks was probably not strong enough to fundamentally overturn the overarching base scenario of inflationary growth. Here, economic growth is at or above potential and inflation is slightly above the central bank target of 2%. This environment is generally favorable for risky assets such as equities.

Still cautious in the short term

Overall, however, it is premature to bet on a permanent market recovery. The negotiations could prove to be bumpy and the time frame is short at two weeks. For the time being, we will therefore remain defensively positioned. Above all, this means that equities and bonds remain positioned below the long-term orientation, while the money market remains overweighted.

 

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