Risk markets recovered and markets repriced central bank action this week, after President Trump announced a two-week ceasefire in the Middle East. Attacks initially continued after the announcement but paused in the early hours of Thursday, except for Lebanon, where Israel continues its forceful military incursion. Despite the temporary and fragile ceasefire, the Strait of Hormuz (SOH) remains effectively closed, and the warring parties disagree publicly on some key ceasefire conditions, particularly those related to Lebanon and the control of the Strait of Hormuz.
Talks to agree on a more permanent ceasefire will begin today in Pakistan, with US Vice President JD Vance leading the US delegation, and Iran represented by high-level political figures, parliament speaker Mohammad Ghalibaf and foreign minister Abbas Araghchi. We still think it is going to be difficult to find common ground on the most controversial issues. Iran still insists on its right to enrich uranium, which the US says they cannot accept. A new major point of disagreement is Iran’s demand to maintain control of and charge tolls on the Strait of Hormuz. As we write in our Geopolitical Radar – Pause, Not Peace, 10 April, a ceasefire deal that leaves the Islamic regime in charge of the strait is nothing but prelude to a new war in the future.
Oil prices fell significantly this week with Brent initially trading around USD 90 per barrel after the ceasefire announcement. Since, the price has moved in the USD 90-100 range, as Israeli operations in Lebanon have continued despite Iran and mediator Pakistan, saying the ceasefire was agreed to also apply to Lebanon. Regardless of whether a more permanent ceasefire can be agreed upon, energy prices will remain elevated for longer. The IEA estimates more than 40 crucial energy assets in the region have been damaged. Repairs and ramping up production will be costly and take time. In addition, if Iran is left in control of the strait, a significant geopolitical risk premium will remain.
As energy prices fell, markets also repriced central bank action. For the ECB, markets now price in the first rate hike by June, followed by another one later this year. For the Fed, markets now see a slightly higher chance of a rate cut next year. We have not made any changes to our ECB or Fed calls, but we have revised our Bank of England call and now expect them to keep the Bank Rate unchanged at 3.75% for the coming 12 months. As energy and rate markets adjusted, euro reversed most of its war-time losses vs. the dollar and is currently trading close to the 1.17 level.
Next week will be rather light in terms of data. On Tuesday, China will release trade data for March, which will likely again show robust export growth. One caveat, though, is that the data is very volatile from month to month, so we are likely to see some correction from the extraordinarily high figures in February. The data will also not cover the full impact of the Iran war. On Thursday, China will release both Q1 GDP as well as the monthly batch of data for retail sales, housing, industrial production and investments. Especially housing and consumer data is in focus as these have been the weak spots of the economy. GDP growth is expected at 4.8% y/y, up from 4.5% y/y in Q4, driven by strong export growth. On Thursday, we also get the February GDP print from the UK. Euro area March final HICP print and ECB minutes are also due on Thursday.
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