Oil markets have stabilised lower for now and global equity markets have rallied this week on the back of renewed optimism around a deal in the Middle East. On Thursday afternoon, media reports emerged that the US and Iranian negotiators had settled on a Memorandum of Understanding (MOU) that would extend the ceasefire by 60 days, allow renewed talks on Iran’s nuclear program and enable a gradual reopening of the Strait of Hormuz (SOH). The deal is still pending US President’s approval, and Iranian officials have not confirmed media reports. According to US Treasury Scott Bessent Donald Trump’s three “red lines” – reopening the Strait, Iran surrendering highly enriched uranium and ending its nuclear program – remain prerequisites for any agreement.
It appears the two sides are negotiating in good faith and there is indeed strong momentum towards a deal. The devil is in the details, however. The US forces and the IRGC have continued to clash this week, underlining the fragility of the current ceasefire and perhaps signalling that there is also growing impatience on both sides as the talks drag on. We think one of the key sticking points for a deal is the SOH issue. If the US ends its blockade of Iranian ports in exchange for Iran allowing more traffic via the strait, the US also effectively forgoes much of its leverage for the upcoming complex nuclear talks. It is unrealistic to expect that an initial MoU would be able to address all the specifics of Iran’s nuclear program, and more likely that those talks would take time.
We do think it is possible that a compromise can be found in several other issues – such as those related to Iran’s frozen assets, sanctions and even the issue of the highly enriched uranium. Yet, an agreement on these issues hinges on the two sides finding common ground on Iran’s overall ambitions regarding the nuclear program and its ambitions in maintaining a role in the governance of the SOH. As Iranian officials have put it, nothing is agreed until everything is agreed on.
As markets are increasingly optimistic that traffic volumes in the SOH could start normalising soon, Brent oil price has stabilised below USD 100 level this week. Short-term inflation expectations, as well as central bank rate pricing, have fallen in tandem. For the ECB, the market remains convinced that they will hike rates by 25bp in June. The April meeting minutes confirmed this view, and we agree. But the timing for the next hike is more uncertain. We still think the ECB could move already in July especially if there is no deal in the Middle East, but risks are skewed towards a hike later in the autumn. For the Fed, we updated our call recently and now expect them to hike in December, followed by a hike in March next year. Economic growth in the US has surprised on the upside recently, underlying price pressures are building up and due to lower labour supply growth going forward, the economy is more prone to overheating than before.
Next week, focus will remain in the Middle East. Over the weekend, we will get official May PMIs from China, followed by the private RatingDog releases for manufacturing PMI on Monday and services on Wednesday. There has been some divergence lately with the private releases being stronger. On Tuesday, all eyes will be on the EA flash inflation print for May. In the US, key data points will be the ISM releases on Monday and Wednesday, as well as labour market data throughout the week.
 that would extend the ceasefire by 60 days, allow renewed talks on Iran's nuclear program and enable a gradual reopening of the Strait of Hormuz (SOH). The deal is still pending US President's approval, and Iranian officials have not confirmed media reports. According to US Treasury Scott Bessent Donald Trump's three "red lines" - reopening the Strait, Iran surrendering highly enriched uranium and ending its nuclear program - remain prerequisites for any agreement.){kind=link}