Enrique Velasco, director of FX of Cecabank
After it expired the ultimatum launched by Donald Trump, who included the explicit threat of intensifying the attacks on Iran and even the destruction of “a real civilisation”, the stage gave a last-minute money order. Barely hour and a half before the limit set by Washington, the United States and Iran accepted a provisional truce of two weeks, brokered by Pakistan and conditioned to the re-opening of the strait of Ormuz.
The announcement has been received with an immediate relief for the overall financial markets, that they have reacted with force after weeks of high volatility. The oil registered on Wednesday a fall close to 15%, the elder in almost six years, reflecting the sharp reduction of the geopolitical risk associated with the possible close of the strait, for where goes nearly 20% of the worldwide energy supply. This movement illustrates up to what point the market had built in an extreme stage that, of having reified, would have had significant consequences on the overall inflation and the economic growth.
The reaction also has been spread quickly to the set of one the financial assets, reflecting a clearing folds of the most defensive strategies adopted in the last few weeks. The stock exchanges went up that meeting in a generalised way, whereas markets of debt registered a considerable reduction, with significant falls in the returns of the sovereign bonds.
Additionally on the market of currencies a change of tone was produced significant. The US dollar with a downward trend corrected, in line with the exit of flows of shelter, whereas other currencies usually defensive lost traction. On the other hand, the asian currencies showed a remarkable strength, reflecting not only a great appetite to the risk, but also the sensitivity of these economies to the stability of the international trade.
In this context, the dynamic suggests that the market begins to discount a stage of smaller tension maintained, although still very conditioned to the continuity of the political dialogue and to the absence of episodes that put in question the fragility of the truce.
However, beyond the initial reaction of the markets, the agreement is far a lot of supposing a structural resolution of the conflict. More than a definite closing, the agreement seems work as a provisional solution that allows to both parts earn time, reduce immediate costs and build an internal short story of containment and success. The third-party mediation, as the prominent role of Pakistan, and the beginning of diplomatic contacts give to the process a semblance of advance, but lots of the essential matters are open to divergent interpretations.
In practice, the most sensitive element will be the management of the maritime transit in the strait of Ormuz. If the standardisation of the traffic is produced in a gradual and controlled way, would be able to consolidate a situation of accomplished facts that it reduces the incentives for a resumption of the armed confrontation. Following on from this, the effective re-opening of the energetic flow would act as an anchor of stability. However, any alteration, although is limited, would be able to revert quickly the confidence of investors and increase the volatility.
At the same time, this dynamic has clear implications in the strategic balance. Iran, when maintaining its influence skills on the strait, strengthens its position on the field, whereas the United States conserve margin to reactivate the pressure if its objectives do not move forward in the negotiating table. This balance suggests that the most probable stage short-term is not a structural resolution, but instead one desescalada maintained by tactical interests, with a fragile balance that will depend on operational decisions, behavioural of the markets and of the posture of regional actors.
From the optics of the market, this involves that the actual appetite to the risk is supported more in expectations that in certainties. The investors are starting to discount a stage of smaller tension maintained, but this reduction is still vulnerable to any diplomatic or incident setback in the strait. The evolution of the negotiations it will be key for determine in the next weeks if this tone change is consolidated or if, on the other hand, is a parenthesis within the dynamic of uncertainty.
With everything, is still prompt to consider the actual extent of this agreement. The high geopolitical uncertainty is still current and any diplomatic decision would be able to alter quickly the stage. However, for the first time in weeks, seems begin to see a path – or at least an address – towards a possible stabilisation of the conflict.
