Stocks surge, oil dives below $100 as Iran ceasefire sparks relief rally
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Oil prices sank below $100 a barrel and stocks and bonds surged on Wednesday, after U.S. President Donald Trump announced a two-week ceasefire with Iran that brought some relief to markets on hopes for a resumption of oil and gas flows through the Strait of Hormuz. Trump announced the ceasefire less than two hours before his deadline for Iran to reopen the strait or face devastating attacks on its civilian infrastructure. Iran said it would cease counter-attacks and provide safe passage through the waterway if attacks against it stop. The market rally revived investor talk of the 'TACO trade' - or 'Trump Always Chickens Out' - after past policy reversals, although some noted the damage to energy infrastructure across the Middle East over the month-long conflict would inflict long-termstrains on the global economy and the prospect of a lasting peace were far from certain. "It's a huge relief to see that we finally have a ceasefire between the U.S. and Iran," said Nabil Milali, portfolio manager at Edmond de Rothschild, adding he believed Trump had calculated that further escalation would likely backfire. "So he did the only other option he had in front of him, which is a unilateral TACO," he said. Oil prices would likely remain "structurally higher" for a while, he added. Brent oil futures were last down 13.8% at $94.27, while U.S crude futures were down 15.4% at $95.55 a barrel, but were still well above pre-war levels. European stocks rose nearly 4% in early trading, following strong gains across Asian markets. Wall Street futures pointed to gains of 2.5%-3.2%. The U.S. dollar fell broadly, having been the haven of choice during the tumult, with the index against other major currencies easing to 98.819. "Markets can worry about the complexities later. For now, they've been given the green light to rally," said Matt Simpson, a senior market analyst at StoneX.
TWO WEEKS OF RELIEF
Beyond the immediate relief, investors were keen to see whether the ceasefire leads to a broader resolution before placing major bets.
"Does it mean people are going to take new risks? No, it doesn't," said Martin Whetton, head of financial markets strategy at Westpac. "It would have to actually be a lasting peace (to change things). People aren't actually taking risk."
Gold prices climbed 2.4% to $4,814 per ounce.
U.S. Treasuries surged after the announcement with traders putting the prospect of rate cuts from the Federal Reserve later in the year back on the table, although doubts about whether oil prices will go back to pre-war levels kept enthusiasm in check.
The yield on the benchmark U.S. 10-year Treasury note dropped to 4.244%, the lowest since mid-March, while the U.S. 2-year Treasury notes sank to 3.7235%.
Euro zone government bond yields also dropped sharply, as the ceasefire prompted traders to dramatically scale back their bets on future rate hikes from the European Central Bank.
"The evolution of oil would determine if this rally (in bonds) continues or gets faded which of course depends on how the negotiations go," said Rohan Khanna, head of euro rates strategy at Barclays.
"In the very short term, it may remove the impulse for the ECB to hike rates in April and the market has repriced that meeting accordingly, but the meeting is still three weeks away and that’s a long time in these markets."
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