US-Iran de-escalation: A positive shift, but not a final resolution

• The apparent US-Iran memorandum of understanding reduces a major geopolitical tail risk and improves the near-term macro backdrop, especially through lower oil prices.
• If the Strait of Hormuz reopens and energy flows normalise, the main market effects should be softer inflation pressure, better risk appetite, and a stronger case for non-US equities to outperform.
• This remains an early and fragile positive: the agreement is not yet signed, the reported terms are still unconfirmed, and implementation risks remain high.

Over the weekend, the US and Iran appear to have agreed a memorandum of understanding. It is not a final settlement, but it is a meaningful step towards de-escalation. A formal signing is reportedly pencilled in for Friday. This raises the odds that the Strait of Hormuz will reopen and suggests the most acute phase of the crisis may be passing.

This is a positive development, but it is still early and untested. For more than 100 days, markets have been pricing a geopolitical risk premium into oil and, at times, into government bonds and broader risk assets. At the same time, many investors have assumed that, as in past geopolitical shocks, the economic damage would prove limited unless energy flows were disrupted for longer.

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. Early on Monday market pricing for US and UK policy rates have moved lower.

In foreign exchange, the implications are nuanced. The USD has strengthened during this period, but DXY is up only around 2%¹ since the start of the conflict. To us, that is telling. A sustained de-escalation could remove some of that support, and we expect the dollar to weaken if this agreement holds. A weaker USD would be more supportive for non-US equities and some emerging markets.

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.

To be clear, we see this development as positive and expect a return to the trends we outlined in our year-ahead outlook and recently reaffirmed in our mid-year outlook. That said, this is not the moment to declare the Middle East issue fully resolved. The memorandum is not yet signed, implementation will matter more than headlines, and there are several clear ways this could still break down. Mine clearing and shipping normalisation may take longer than markets hope, even if the Strait formally reopens. Israel could yet act as a spoiler. Hardline factions inside Iran may resist the terms. The 60-day negotiation window also leaves plenty of room for tension to re-emerge, especially around sanctions relief and nuclear restrictions.

The message for investors is not that risk has disappeared, but that a major tail risk has likely been reduced. On balance, we lean positive. If the agreement holds, it should improve the near-term macro backdrop, support our core view of a reacceleration in activity, and strengthen the case for non-US markets to outperform US markets on a relative basis.

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