Investors hailed the news that Donald Trump had held off on his threat to bomb Iran into “the stone ages”, with Iran’s foreign minister saying passage through the strait of Hormuz would be allowed for the next two weeks under the management of its military.
Oil was poised for its biggest daily percentage drop since the Covid-19 pandemic in March 2020 even though it is not certain that the US will accept the 10-point proposal drawn up by Iran. How the strait will be reopened and managed beyond the two-week grace period is yet to be determined.
Brent crude oil, the international standard, had dropped by 13.9% to $94.10 by midday in the UK, and futures for US crude oil sank by almost 16% to $95 a barrel. The prices remain well above where they were before the start of the war, when Brent traded below $73 a barrel.
With just over an hour until his deadline was due to pass, the US president said he was holding off on threatened attacks on Iran, subject to Tehran agreeing to a two-week ceasefire and reopening of the strait of Hormuz.
Soon after, Iran’s national security council confirmed it had accepted a two-week ceasefire if attacks against Iran were halted. Tehran said peace negotiations with the US would begin in Islamabad on Friday.
European stock markets rallied strongly when trading began on Wednesday. The pan-European Stoxx 600 index gained 4%, poised for its biggest one-day rise in more than four years.
Travel and leisure stocks soared, with Air France gaining 14.5%, Lufthansa’s shares jumping by 11%, the British Airways owner, IAG, up 9.5%, and the holiday group TUI gaining almost 12%.
In London, the FTSE 100 index was up by almost 3% by midday, gaining 298 points to 10,646 points, its highest level since the early days of the Iran war.
Oil company shares tumbled, though, with BP and Shell losing more than 5%.
That followed strong gains in Asia Pacific markets, where Japan’s benchmark Nikkei 225 gained more than 5%, Australia’s S+P/ASX 200 jumped 2.55% and South Korea’s Kospi soared by 7.5%. Elsewhere, Hong Kong’s Hang Seng was up 3.1%, while China’s CSI300 index gained 3.2%.
Jim Reid, a markets strategist at Deutsche Bank, said: “Investors will be breathing a big sigh of relief that an off-ramp out of the war is being taken even as there’ll be various elements to watch to see whether this leads to sustained de-escalation.
“Will the ceasefire hold? We saw some strikes by Israel and Iran overnight, though these may have been in the works before the conditional ceasefire. We’ve also seen conflicting commentary on whether the ceasefire will extend to Israel’s action in Lebanon. Can talks lead to a permanent cessation of hostilities?”
In the bond market, Treasury yields eased on word of a potential ceasefire. The yield (or interest rate) on the 10-year Treasury fell to 4.24% from 4.30% earlier on Tuesday. UK government bond prices also strengthened, pushing down the yield on 10-year UK debt to 4.7%, down from 4.9% on Tuesday.
Gold prices rose more than 2% to $4,812 an ounce. Cryptocurrencies also rallied, with bitcoin advancing 2.9% to $71,327, and ether climbing 5.6% to $2,234.
Saul Kavonic, the head of energy research at MST Financial, said the two-week pause provided “an off-ramp for Trump’s overly bombastic ultimatum, but not yet an off-ramp for oil markets or the war”.
He told Reuters it was unlikely oil and LNG production would resume until there was more confidence in a lasting ceasefire.
Kavonic said: “A two-week ceasefire would enable a release of some oil and LNG tankers from the strait of Hormuz to market, providing some market pressure relief in May. This does not result in more production, just a release of storage on water.”
For markets, the most critical issue remains the status of the strait of Hormuz, said Neil Shearing, the group chief economist at Capital Economics.
“The [10-point] framework appears to allow the full passage of oil tankers through the strait, but the terms under which this would occur remain unclear. Some reports suggest the introduction of transit fees of around $1-2m per tanker.
“Given that tankers typically carry 1–2m barrels of crude, such fees would add roughly $1 per barrel to the cost of oil transported through the strait. This would therefore have only a modest impact on global energy prices, though, in practice, it could amount to a de facto partial nationalisation of the shipping route,” Shearing said.
Prashant Newnaha, a senior strategist at the Singapore-based TD Securities, said a renewed escalation could not be ruled out, “but markets are treating this ceasefire as the real deal and all parties involved will sell the ceasefire as a major win.
“Looking further out, oil prices are not returning to prewar levels. This will leave inflation persistence as a key theme for markets to ponder,” he said.
Earlier on Tuesday, US stocks swung sharply during regular trading.
The S+P 500 fell as much as 1.2% but stocks rallied at the end of trading after Pakistan’s prime minister urged Trump to extend his deadline for another two weeks and asked Iran to open up the strait for the same period of time.
Oil prices have soared since the US and Israel struck Iran at the end of February, unleashing a conflict that has run for more than five weeks. Tehran has largely closed the strait, through which a fifth of global oil and liquefied natural gas is transported, causing a global energy crunch.
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