A fragile ceasefire to keep markets on edge

A fragile ceasefire to keep markets on edge

• Oil pared losses after reports of more missiles fired into Israel.
• The gold price extends its decline.
• Stocks are higher, while defense stocks remain under pressure.
• If geopolitical tensions ease, then we could see the AI trade come back.

The oil price has dropped sharply on Tuesday after President Trump announced a ceasefire between Iran and Israel. However, while the agreement initially looked solid, this is still a very fluid situation. The IDF announced this morning that missiles were fired into Israel from Iran, which caused the oil price to pare gains, as Brent crude edged back towards $70 per barrel.

The rapid oil price decline earlier today was a sign that the market is taking this agreement as a done deal. Brent crude had rallied nearly 20% in the past month as a war premium was attached to the oil price, that is now being unwound. However, if there are more signs that the ceasefire is not being held, then we could see the oil price resume its uptrend.

Risk sentiment is sensitive to headline risk

We have mentioned that intraday volatility in the oil price, the Brent crude price is down nearly 3%  and has traded in a wide range between $66-$73 per barrel. The gold price has dropped $45 per ounce, and the dollar, which was the safe haven of choice in recent days, is now the weakest currency in the G10 FX space. Trump has flipped a switch, and the market is responding, although risk sentiment is sensitive to headline risk.  

Oil prices may continue their decline, as the Strait of Hormuz looks off limits in this conflict

The speed of the oil price decline makes it hard to predict just how far it will fall, the market tends to overshoot itself. However, after slicing through the 200-day and 100-day moving averages, Brent could find decent support at $66.60, the 50-day moving average, and the lowest level since before Israel launched air strikes at Iran earlier this month. Freight prices are falling, as are some agricultural prices, since a large chunk of the world’s fertilizer flows through the Strait of Hormuz.

Tariffs not geopolitics worry investors

The Vix volatility index never really surged on the back of this conflict, and declines for global indices were relatively modest. The most affected was the Eurostoxx index, which fell more than 2% in the past week, however, US stocks have posted gains in the last week. The market had a far stronger reaction to US trade tariffs than to geopolitical risk, which highlights that economic concerns are more  worrying for stock markets than geopolitical issues, at this stage.

Stock market responds

European stocks have surged at the open. The Eurostoxx 50 index is up more than 1%, while the FTSE 100 is a laggard, as it gets dragged lower by the oil majors and defense stocks included in the index. The S&P 500 is expected to open more than 50 points higher, as the main US blue chip index inches back towards the record high from earlier this year.

What next for financial markets?

The question now is, what will the market focus on next? With geopolitical risks expected to moderate from here, the focus could shift to Q2 earnings season that will start in a few weeks, and US trade tariffs. If we assume that tariffs will be sewn up in the coming weeks, then the focus could shift to the AI trade and a cruisy summer for volatility.

Tesla’s Robotaxi signals a new era for the EV maker

The US stock market mostly ignored the geopolitical risks last week, and tech dominated. Tesla was the best performing share in the S&P 500 on Monday, after the launch of its robotaxi. We will watch to see if it continues to extend gains, the share price is still down 10% YTD, so there could be room for further gains. The weakest performer was Super Micro, which is the US’s largest bitcoin-focused stock. However, this stock could recover on Tuesday as Bitcoin continues to rally, and is back above $105,000 per coin.

Defense stocks could suffer if the ceasefire holds

The ceasefire could signal weakness ahead for defense stocks. BAE systems is one of the weakest performers on the FTSE 100 today, along with Babcock and Rolls Royce is barely eking out a gain. Rheinmetall is the weakest performer on the Dax index this morning, as the German defense firm, which is higher by 171% so far this year, comes off the boil. During the US session we will be watching Palantir closely. It has risen 15% in the past month as geopolitical tensions have surged. Now that the conflict in the Middle East has de-escalated, this tech darling could come under some downward pressure, as it acts like a defense stock, although it has tech qualities.

FX view: The dollar looks vulnerable

The  decline in the dollar is most pronounced against the commodity currencies, the yen and the pound. While one might expect commodity currencies to come under pressure due to the rapid decline in the oil price on Tuesday, the opposite is true today. The FX market was the only major financial market that acted in a risk off fashion on Monday, so this is why the dollar is unwinding this morning. We expect the dollar to remain sensitive to headline risk from the region.

Ahead today, the focus will be on the ceasefire, and whether it can hold. We expect market sentiment to remain nervy, as this is the dominant theme moving markets on Tuesday. The Nato summit later on Tuesday is also worth noting.