Oil prices, specifically Brent crude and West Texas Intermediate (WTI), fell sharply as the US and Iran halted a nearly two-week exchange of strikes, signaling a de-escalation of tensions in the Middle East. Brent crude dropped as much as 7.4% to below $90 a barrel at one point, later paring losses. WTI crude fell 5.4% to $84.46 a barrel, while Brent futures were trading at $87.58, down 4.47%, and September crude oil futures on WTI were at $84.83, down 5.02%. This pause in military action has been seen as a "tangible signal of de-escalation," according to ING analysts, leading to hopes for diplomatic solutions and improved sentiment in the markets. Shoji Hirakawa, chief global strategist at Tokai Tokyo Intelligence Lab, noted that a resolution to the conflict would be a positive development, fostering hopes for negotiations.
In response to the easing tensions, global stock markets and bonds rallied. MSCI’s Asia Pacific equities gauge rose 0.4%, and contracts for the Nasdaq 100 Index climbed 1.2%. The dollar, which had served as a safe haven during the conflict, weakened against most of its Group-of-10 peers. Treasuries gained, with the yield on the 10-year Treasury falling five basis points to 4.63%. Government bonds in Australia and New Zealand also saw gains. Gold, a traditional safe-haven asset, led precious metals higher, climbing over 1% to $4,100 an ounce, specifically spot gold rose 1.2% to $4,099.44 an ounce.
The decline in oil prices also alleviated concerns about inflation, which in turn tempered expectations for interest rate hikes by central banks. This shift created a more optimistic outlook for bond markets. While no changes in interest rate policy are expected from upcoming central bank decisions, officials are likely to remain vigilant regarding the inflationary impact of higher energy prices. However, the de-escalation has not yet led to a significant increase in vessel flows through the Strait of Hormuz, with analysts noting that shippers remain cautious and desire greater confidence in safety before increasing traffic.
Despite the positive signs, some analysts, including ING, caution that a full recovery in shipping flows could be slow and partial. Additionally, new developments such as Houthi attacks on Saudi oil installations in Jazan and Yanbu, which are critical for Saudi Arabia's crude oil exports via the Red Sea, and an alleged Ukrainian attack on an Iranian commercial vessel in the Caspian Sea, could introduce new uncertainties. These ongoing shipping risks and geopolitical developments are factors that some analysts believe could still support oil markets and pose upside risks to global inflation, even with the recent de-escalation between the US and Iran.
