Ceasefire deal sparks relief rally

The latest developments in the Middle East mark a tentative but meaningful shift in the trajectory of the conflict, with reports of a two-week ceasefire agreement between the US, Iran and, albeit reluctantly, Israel suggesting that the situation may have reached peak escalation.

 
While this does not guarantee a lasting resolution, it provides both sides with a potential off-ramp and has already begun to ease some of the immediate pressure on global markets, particularly in energy.

Crucially, the potential reopening of the Strait of Hormuz is the most significant development from a market perspective. The disruption had removed as much as 20% of global oil supply, and even a partial restoration of flows represents a major shift in supply dynamics. This has allowed markets to begin pricing out some of the extreme risk premium that had built up in recent weeks, helping to stabilise oil prices and support risk sentiment more broadly.

However, the situation remains fragile. The terms of the ceasefire appear heavily tilted in Iran’s favour, raising questions about whether the agreement is politically sustainable, particularly for Israel and the US. There is also a real risk that talks break down and the conflict reverts to its previous state, or even escalates further, once the ceasefire window expires. As a result, markets are likely to treat this as a pause rather than a resolution.

Looking ahead, even in a best-case scenario, the economic impact of the conflict is unlikely to fade quickly. Damage to infrastructure, higher shipping and insurance costs, and structural shifts in energy pricing mean the shock will likely have a long tail, feeding through to inflation, growth and corporate earnings over the coming months. In that sense, while the ceasefire has improved the near-term outlook, the broader macro implications of the crisis are still unfolding.

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