An hour and a half before the deadline of Trump’s ultimatum to Iran (2:00 CET on April 8), the US President accepted the Iranian 10-point proposal leading to a two-week ceasefire, allowing time for negotiations to agree on a more lasting truce starting next Friday: US envoys (Witkoff and Kushner), led by Vice President Vance, will meet Iranian authorities, headed by the Speaker of the Iranian Parliament Ghalibaf. The meetings will take place in Pakistan, a country that has led the mediation with strong support from China.
Among the reasons that led to this outcome are certainly military considerations related to the depletion of missile stocks of the US and Gulf countries, both offensive and defensive. Despite the greater losses and damages suffered by Iran, its resilience has probably been underestimated as well as its ballistic arsenal (estimated to be used at 50%) and drones, with which it repeatedly damaged Gulf oil infrastructure, a strategy by Iran that politically isolated it but also put strategic pressure on the aggressors.
The terms of this truce, which Vance himself called fragile, are closer to the Iranian proposal (except for the duration) than the American one, but now a peace must be negotiated that will see old and new critical issues, starting with uranium enrichment, ballistic missile arsenal and, a more delicate novelty, Iran’s claim of sovereignty over the Strait of Hormuz, a crucial maritime trade passage, especially for energy (20% of global supply, about half of Asian supply). Among these, a compromise could be the civilian use of uranium under strict IAEA supervision and a minimal missile arsenal for self-defense; economically, the crucial issue is obviously the reopening of the strait to regular navigation. On this, the Iranian demand for sovereignty is unacceptable. However, some form of responsibility for security, in exchange for a transit fee, could be tolerated, at least pro tempore, to allow Iran to obtain funds to finance part of the necessary reconstruction. After all, in the case of large tankers capable of carrying about 2 million barrels, the fee of $1/b, or $2 million per ship, would correspond to just over 1%, a price widely saved by buyers if the oil price steadily falls below $100/b.
We are therefore in the scenario between the first two we had considered with a cessation, for now provisional, of US military operations (TACO-Trump Always Chickens Out) after more than a month of conflict, with the hope of a negotiated agreement (as called for on Al Jazeera by Iranian Foreign Minister Araghchi last week).
In the immediate term, risks concern the “military” sustainability of the truce: for example, the divergence, already emerged, of interpretation between Iran and Israel (and perhaps also between the US and Israel?) on the inclusion or not of secondary theaters involving Iranian proxies Houthi and, above all, Hezbollah. The intensification of clashes in Lebanon signals the risk of these hotspots. In the medium term, everything will depend on the successful outcome or not of the negotiations, so we have two weeks to find out. It is difficult to think of a return to maritime traffic at the pre-war regime; at best, an international guarantee force (patrolling?) (probably including Gulf, European and Asian countries) will be necessary to ensure the safe passage of ships.
Brent immediately fell back below $100, close to $90, and is expected at about $75 by year-end (about $15 less than Tuesday the 7th and just as much above the levels at the beginning of the year). At these levels, the path corresponds to the best scenario among those envisaged in our report a month ago. The impact on European growth and inflation would be about -0.5% and +0.8% respectively, with inflation, after a (transitory) peak also above 3%, expected to settle around 2.8% on average for the year. This would be a level all things considered manageable, without harmful overzealousness by the ECB, which could be satisfied with a 25 basis point rate hike (two at most). Equities and bonds have risen significantly, recovering more than half of the losses since the end of February: the table below shows how much each asset class deviates from the prevailing trend before the outbreak of the conflict (and the maximum deviation reached last March 27).
From this simple examination, the greater (risk-adjusted) impact is confirmed to have been suffered by gold (the worst asset class), the euro/dollar and bonds (the table highlights the rise in US rates, but for the Eurozone it would be even more evident) compared to equities; this remains true even after the rebound following the truce announcement. Therefore, in perspective, a convincing normalization should have a greater impact (always risk adjusted) on bonds than on equities and, in general, on the other variables in the “red zone.”
The positive reaction to the truce announcement, entirely consistent with the improved directional news flow, probably also reflects the closing of short positions and other technicalities, bringing the +5% of European stock markets and almost 3% of the BTP beyond the correct proportion.
