Market Brief: Markets soar on hopes for Iran deal

The dollar is trading near its lowest levels in months, bond yields are plunging, and equity indices advancing after Axios reported that Washington and Tehran are nearing an agreement to end the war in the Middle East. Both global crude benchmarks are down more than 9%, with Brent trading below $100 and West Texas Intermediate nearing $90, and most major currencies are climbing against the greenback as traders scale back expectations for an energy price-induced shock to economies with heavy import exposures.

A US-Iran deal could reshape the conflict and reduce risk across the global economy. According to Axios, Jared Kushner and Steve Witikoff are negotiating a one-page, 14-point memorandum of understanding that would see Tehran pausing its nuclear enrichment activities, the US lifting sanctions on Iranian trade and money flows, and both sides ending their blockades on shipping through the Strait of Hormuz. A rapid refilling of worldwide energy inventories could follow, easing growth strains almost everywhere.

The report comes after President Trump seemingly extended an olive branch last night, pausing “Operation Freedom”—a US military attempt to reopen the waterway—saying “Great Progress has been made toward a Complete and Final Agreement” with Iran. In its single day of existence, the operation saw two US-flagged vessels transit the Strait even as American and Iranian forces exchanged fire and drone and missile attacks struck ships and energy infrastructure targets.

Caution seems prudent, given that US officials have signaled optimism* at multiple points during previous negotiating rounds, only to come away empty-handed—and for the Strait to remain closed. There’s little question administration officials are looking for an exit ramp, but the unilaterally-prepared memo represents a framework for further talks rather than a binding agreement, and could meet with a cool reception in Tehran, particularly given that Iranian leadership remains deeply divided. Until both sides have put ink to paper and shipping activities resume, hedgers would be wise to price this as a diplomatic aspiration rather than a geopolitical fact.

The yen is giving back some of its gains after jumping more than 1.9% this morning, suggesting the Ministry of Finance may have timed another intervention to coincide with thin liquidity during the country's Golden Week holiday. Authorities stepped in last Thursday when the exchange rate fell past the 160 threshold against the dollar, and have achieved some success in generating a solid bid for the yen since, with risk reversals—a measure of skewness in expected spot market outcomes—now leaning toward further appreciation in the near term.

In broader financial markets, ten- and thirty-year gilt yields are rapidly unwinding yesterday's gains, suggesting—to us, at least—that tomorrow's local elections are playing a relatively minor role. Keir Starmer's Labour is expected to take a solid drubbing—raising the risk of a tilt toward a more profligate left under new leadership—but for now, this is being offset by an easing in inflation expectations, with the Bank of England seen raising rates at a slower pace in the months ahead. The pound is advancing against the dollar this morning after holding steady through much of yesterday's tumult. We think the risk of a major volatility shock around the elections looks overstated; sterling is likely to continue tracking global dynamics more closely than domestic ones.

Economic fundamentals will likely be overshadowed by a washout in long-dollar positioning over the next few days if the Axios headlines prove durable, but signs of strength in the US economy shouldn’t be discounted ahead of Friday’s non-farm payrolls report. Data releases this week—including yesterday’s Job Openings and Labor Turnover report and the Institute for Supply Management’s services-sector survey—have been consistent with an American economy that is still generating solid demand, strong earnings, and decent employment growth. An upside surprise can’t be ruled out.

*Often, I should point out, via the same reporter at Axios.

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Notes: DXY: Dollar index, ON: Overnight movement, DMA: Daily Moving Average, Pivot points are calculated on a one-month basis, 3-month and 10-year spreads are against USD, Implied V.: implied at-the-money option volatility

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