The ceasefire is back on, but the good news may already be priced in

There were mixed messages from President Trump on Tuesday about the status of the ceasefire with Iran, at one point he said that the ceasefire would end, then later in the day he said that he had extended it to account for the ‘seriously fractured government in Tehran’. It looks like Trump is willing to give the Iranians more time to agree to the US’s peace deal, however, it remains unclear if the Iranians will bend for the President.

Not your average ceasefire

While the ceasefire has been extended it is worth noting that the US is still blockading the Strait of Hormuz and there are no peace talks currently scheduled after Vice President JD Vance pulled out of meeting Iranian officials in Pakistan this week. This is not your average ceasefire, and it is hard to see any resolution to this conflict at this stage. What is more surprising is the market’s mild reaction to events.

Although global stocks were lower on Tuesday, US indices fell just 0.6% for the S&P 500, and the prospect to an end of the ceasefire failed to seriously spook investors. The oil price rose by more than 3% to $99 per barrel late on Tuesday, it had briefly reached $101 per barrel earlier in the day, however, it did not stay at this level for long. Although this is a ceasefire like no other, the market is still betting that the war will end, and the Strait of Hormuz will reopen.

When will the Strait reopen?

At this stage, it is hard to price in when tankers can flow freely through the Strait once more. Traffic through the Strait has stayed at a trickle throughout the ceasefire, however, there is hope that the next phase of talks between the US and Iran will lead to the Strait reopening, with some investors expecting that to take place by the end of this week.

The longer the Strait remains closed, the more signs we may see of nervousness in the market. After reaching a record high, the Nasdaq snapped its longest winning streak since 1992 on Monday. Although the market mood remains resilient, the strength of the rally in US stocks in recent weeks may not be justified by the news flow. Added to this, the market has already discounted a lot of the good news that could come from an extended ceasefire, and there may not be much more upside for stocks, and weakness in the oil price, until the Strait of Hormuz reopens. It’s impossible to time the end of the conflict due to the mixed, and sometimes contradictory, messages coming out of the White House and Iran’s steadfast position that there will be no talks while the US continue with its blockade.

Will investors start to lose patience?

Overall, the ceasefire was extended, but the prospect of a prolonged peace deal is still a pipe dream. However, the market has ended Tuesday in a state of relative calm: the oil price is back below $100 per barrel, US equity futures have popped higher, and we expect global stocks to follow suit as we move into Wednesday, and the Vix index, Wall Street’s fear gauge, is back below the 20 level.

Today’s price action shows just how quickly the narrative can shift when it comes to the conflict between the US and Iran. The fact that the ceasefire is holding suggests that there is some hope that talks can be extended, and this could sustain a stock market recovery as we move into Wednesday. But if the Strait of Hormuz is not reopened by the end of this week, investors could lose patience.

Chart 1: S&P 500 gets stuck close to its record high

Source: XTB