An extended ceasefire with the Strait of Hormuz reopened?
While Trump’s statement on Saturday that a deal had been “largely negotiated” seems to have been premature, the US and Iran do appear to be closing in on an agreement to extend the ceasefire by 60 days during which the Strait of Hormuz will gradually be reopened, mines cleared, the US blockade of Iran will be lifted and the US will partially lift sanctions to allow Iran to sell oil.
That’s the easy part. Both sides want the Strait re-opened and the oil (including Iranian oil) flowing. But what happens during or after this 60-day period is anything but clear.
The US and Israel, indeed most countries, insist that Iran cannot be allowed to have nuclear weapons. The Iranian side has suggested they would be willing to make a commitment (which they have made before) not to pursue nuclear weapons.
Beyond that, US statements that Iran will give up its enriched uranium stockpile and that the Strait will return to its pre-war status of completely free navigation are disputed by Iranian news services. Likewise, Iranian statements that the agreement will include the unfreezing of Iranian assets abroad are not reflected in US statements.
Moreover, the Israel - Lebanon conflict may or may not be part of these negotiations. Trump says that Israel will retain the right to pre-emptive self defense actions against Hezbollah while Iran wants the ceasefire to apply to Israel too. And very recently, it has emerged that the US has set another condition on a final ceasefire — that other Arab states agree to join the Abraham Accord. This is a hint that actually the impetus behind these ceasefire extension negotiations has actually come from the other Gulf states who are trying to forestall a resumption of hostilities by the US that looked like it might have happened over the weekend.
So, as Secretary Rubio says, “significant progress” has been made but there is much work to do to iron out some details of even the ceasefire extension, let alone a final deal. Perhaps all that’s happened is that Iran (or the Gulf states) have bought another week of relative calm.
Even if it doesn’t lead to a more durable peace, a two-month reopening of the Strait would test a key uncertainty regarding the economic impact of the war: how long it will take for oil and gas prices to return to their pre-war levels. Many industry experts say that it could take six months or more for global oil markets to return to balance and more than two years for natural gas supplies to be reinstated.
But if this agreement — even the slimmed down summarized in the paragraph — is confirmed in the coming days, it should be bullish for markets. I would expect oil and gas futures to fall, equities to rise and bond yields to decline. Essentially, the stagflationary scenario will be partially removed from investor expectations.
In the rest of this week’s Talking Points, I’ll return to the Xi - Trump summit in Beijing, including the possibility that Trump has changed the US position on Taiwan then I’ll review the recent disappointing Chinese data, a surprise rate hike in Indonesia and inflation in Japan and prospects for the Bank of Japan meeting next month.
