By Cecile Lefort
A tentative peace deal between the United States and Iran kicked off a rally in financial markets, sending stocks, bonds and bitcoin sharply higher on hopes that a slump in the oil price will ease inflationary pressures and lessen the need for higher interest rates.
Markets cheered as US President Donald Trump said the key Strait of Hormuz, a choke point for a fifth of the world’s energy supply, would reopen to shipping toll-free after a deal was finally struck with Iran to put an end to nearly four months of war.
While details were still scarce, Trump authorised the end of the US blockade on Iranian ports while Tehran declared oil would begin to flow after its blockade of the shipping lane triggered the biggest oil disruption in history.
Damien Boey, a portfolio strategist at Wilson Asset Management, said the breakthrough was precisely what investors had been waiting for.
“It’s the news that markets have been looking forward to for a while now, so obviously it’s good for equities, some are positive for bonds and credit and parts of the commodities complex too, excluding oil,”
As the oil price tumbled on the news, falling more than 4 per cent to $US83 a barrel in Asian trading, investors piled back into equity markets, sending the Australian sharemarket to its highest level in two months and triggering a rally across Asia with Japan’s Nikkei jumping 5 per cent.
At the same time, bond yields fell to their lowest level in two months as investors bets that easing commodity prices would take the pressure of the nine central banks meeting this week from raising interest rates.
In currency markets, the risk-sensitive Australian dollar jumped to US70.75¢, while in digital assets, bitcoin climbed to its highest level in nearly two weeks to trade above $US65,900.
How will policymakers react?
But for financial markets, the critical question was how policymakers would react to the news, with central banks from Australia to the US meeting this week. The Bank of Japan was the only one that was widely expected to lift rates, with the rest expected to hold fire.
Boey warned that if equities continued to power ahead and financial conditions eased too much, some central banks might still be tempted to raise interest rates to get ahead of inflation.
He said the outlook varied significantly by region. While the US Federal Reserve may still feel behind the curve, Boey noted that the domestic picture in Australia was vastly different, given the Reserve Bank of Australia had already raised interest rates three times this year.
“We’ve actually done more than enough tightening, and so this news [out of the Middle East] will be received quite positively by the RBA, as in, ‘we don’t need to hike’,” Boey said.
Ahead of the RBA meeting on Tuesday, the fund manager is expecting the central bank to talk tough about inflation to manage expectations before it eventually starts to ease borrowing costs again.
“When you talk tough, it makes people think twice,” he said.
Bond traders have rapidly reduced their bets on further tightening for the RBA with money markets now pricing in around 50 per cent chance of a fourth rate increase by the end of the year.
Some traders have even started to price in a small chance of a rate cut next year.
Vivek Dhar, head of commodities at Commonwealth Bank, said he expected oil prices to decline steadily if the diplomatic breakthrough held and supply corridors through the strait remained unobstructed.
“We see Brent oil futures falling to around $US80 by the end of the year, assuming the strait does not close again,” Dhar said.
Kerry Craig, a global markets strategist at JPMorgan Asset Management, said he expected the Australian sharemarket to be among the biggest gainers after lagging its global peers this year.
“The laggards are likely to see the biggest improvement, though it doesn’t mean they’ll catch up to what we’ve seen internationally this year, given the strength in artificial intelligence,” Craig said.
The strategist said a resolution in the Middle East would trigger a rotation out of high-flying technology stocks and into the consumer sectors, which stood to benefit from easing fuel prices.
Emanuel Datt, chief investment officer at Datt Capital, said the peace deal arrived just in time to justify a pause from the RBA. He said the next rate move from the central bank would be down, albeit not for months to come.
But Christian Baylis, the founder of Fortlake Asset Management, warned that while the Iran conflict remained the market’s main swing factor, the profound disruption to the strait has created profound uncertainty.
He added that history showed that interfering with critical supply chains could leave a lingering inflationary impact, which central banks could well underestimate.
“I think it’s still very much a 50:50 proposition. Rates could still go up at this stage,” Baylis said.
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