The ceasefire between Iran and the US is dominating the markets today, but stocks and bonds are giving up some gains, and the Brent crude oil price is hovering around $95 per barrel, after falling below $92 per barrel at one stage on Wednesday.
This is due to reports that Iran was closing the Strait of Hormuz after Israel continued to attack Lebanon. Iran called this a ceasefire violation and said that it would weigh its response to Israel’s actions. Iran also threatened to withdraw from the ceasefire if Israeli attacks continued.
Wil Iran walk away?
There are two points worth noting from a trading perspective, firstly, this is still a news driven market. If the news flow turns negative, then the oil price is likely to pop higher and risk sentiment could fade very quickly. Secondly, the reason why markets have so far only backtracked some of today’s moves is that Iran has only threatened to withdraw from the ceasefire, it has not actually done so.
Although the Strait of Hormuz is closed, there is hope that this will be temporary, and that Israel will stick to the terms of the ceasefire, potentially on the orders of President Trump.
Market direction now depends on Trump
The President’s reaction to Israel’s actions and Iran’s latest response will be worth watching closely and could have a big impact on the market. Will Trump rebuke Israel for breaking the terms of the ceasefire, or will he threaten to resume strikes against Iran if they do not allow the passage of oil tankers through the Strait?
This will ultimately determine whether the risk rally and the decline in the oil price can continue.
Earlier today, Iran and the US said that they would hold talks that could ultimately lead to a prolonged peace deal. Although the situation has deteriorated since then, there are no reports that these talks won’t take place, which leaves residual hope that the ceasefire can hold, although the recent news from Iran shows how fragile the situation remains.
Markets remain optimistic
One way to tell if the relief rally can withstand the latest development in the fragile truce between Iran and the US is to look at the Vix index, Wall Street’s fear gauge. It is currently trading at the highs of the day around 21.5, however, this is well below the peak it reached at the height of this conflict, as you can see below.
Thus, the recent comments from Tehran highlight the fragile truce between the US and Iran, we think that it is not enough to disrupt the risk rally. Only if the US or Iran walk away from the ceasefire completely and bombing restarts do we see the oil price potentially surging back to the highs of this week above $110 per barrel for Brent crude, which could also cause stocks and bonds to slump.
This is a headline driven market, and we expect news flow to remain the key driver of price action as the oil price remains central to global price action for another day.
Chart 1: Vix index, 1 year chart
Source: XTB and Bloomberg
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