Invesco: Agreement between Iran and the US reduces likelihood of rate hikes
By Benjamin Jones, Global Head of Research, Invesco
If the Strait of Hormuz shipping lane reopens and Gulf energy exports increase, a meaningful tail risk comes off the table.
Oil prices have fallen back to their early March levels, which, if sustained, should ease near-term inflation pressures. That would improve the near-term macro backdrop and support risk appetite.
The initial market response has been constructive, with oil softer, bond yields lower, and equity futures firmer. Early trading suggests a better tone across Asia and Europe, though it is too soon to draw firm conclusions about regional relative performance.
According to Iranian state-affiliated media, the reported terms include phased relief on Iranian oil exports, access to some frozen overseas assets, steps to reopen the Strait and improve shipping conditions, and the removal of the US naval blockade.
There also appears to be a 60-day negotiation window for a broader settlement, including discussion of Iran's nuclear programme. These details matter for markets, but they should still be treated as unconfirmed until they are clearly and jointly verified. That distinction matters because the gap between a headline agreement and durable implementation is often where volatility returns.
At the asset-class level, the first-order effect is in energy. Oil may give back more of the war premium if investors gain confidence that Hormuz will reopen and tanker traffic can normalise. We continue to watch the official traffic data closely. That would ease pressure on headline inflation and should support government bonds, especially at the front end.
In our view, these developments take some of the pressure off key Central Banks to hike interest rates. The Fed, BoJ, and BoE meet this week and we will be listening closely to comments from officials around those meetings.
For equities, the main implication may be a better backdrop for cyclical sectors if lower energy prices and reduced geopolitical stress hold. Lower energy prices, lower bond yields, and reduced geopolitical stress should support cyclicals, industrials, transport, and energy-importing equity markets. Energy-importing parts of Asia, along with Europe and some emerging markets, could benefit most if lower oil prices and a softer dollar persist.
US stocks are likely to perform well in absolute terms, especially given the ongoing artificial intelligence capital spending cycle, but the relative case for non-US equity markets improves if the dollar softens and global risk appetite picks up.