The US dollar weakened sharply while the euro and Pound Sterling surged as oil prices crashed over 13% following the reopening of the Strait of Hormuz, triggering a powerful return of global risk appetite.
Markets experienced huge moves on Friday, with oil crashing over 13%. Iran has re-opened the Strait of Hormuz. A US-Iran peace deal is progressing but there are still some contentious issues.
This week’s newsflow started off negative with the breakdown in weekend talks in Islamabad between the US and Iran, but that was followed by a steady trickle of positive statements that on Friday led to the best possible news: Iran has agreed to open the Strait of Hormuz. Stocks in the US burst to fresh all-time highs, while oil dropped over 13%.
The Strait Re-opens
The headlines from the Middle East this Friday are a major relief for global markets.
Following a frantic series of diplomatic exchanges in Islamabad, Iran has officially announced the reopening of the Strait of Hormuz to international shipping.
This move coincides with the implementation of a 10-day ceasefire between Israel and Hezbollah in Lebanon, which began on Thursday.
For a market that had been pricing in a lengthy closure of the world’s most important energy chokepoint, these developments suggest a significant de-escalation is finally taking hold.
It is a positive surprise that has immediately triggered a massive unwinding of the geopolitical risk premium that has dominated since early March.
The most dramatic reaction has been in the energy markets, where oil prices have gone into a freefall.
Crude plunged by more than 13% on Friday as the prospect of millions of barrels of stranded oil finally reaching global markets has saturated the bid.
While the physical reopening will take time due to mine-clearing operations, the paper market is already moving on the assumption that the supply crunch is over.
This is providing a massive tailwind for global equities, with the S&P 500 and the FTSE 100 both posting gains of over 2% in early trading.
The impact on currency markets has been just as sharp.
The US dollar, which had been the ultimate safe haven throughout the conflict, saw its strength fade as risk appetite returned.
The EURUSD climbed above $1.18 as European growth concerns eased alongside falling gas prices.
Similarly, the GBPUSD found strong support, rising to $1.3590 as the threat of an energy-driven UK recession began to recede.
In the bond market, the move was equally decisive; US 10-year Treasury yields fell by 12 basis points to 4.13%.
This suggests that investors are quickly pivoting away from “war-time” inflation fears and are once again focusing on a more normalized path for central bank interest rates.
High-profile political figures have been quick to take credit for the breakthrough.
President Donald Trump, speaking from the White House, struck an optimistic tone regarding the ongoing negotiations.
“We’re going to see what happens. But I think we’re very close to making a deal with Iran,” Trump stated, adding that “if a deal is signed in Islamabad, I may go.”
This follows his claims that Tehran has already agreed to major concessions, including the potential handover of enriched uranium.
On the other side, the tone from Tehran remains more transactional.
An Iranian official noted that the decision to reopen the waterway was a show of good faith, but warned that “a bilateral ceasefire or negotiations is unreasonable” if regional strikes against their allies do not permanently cease.
That said, we need to acknowledge that the details of the reopening show that we are not yet back to business as usual.
While Iran says the Strait is open, the Islamic Revolutionary Guard Corps still maintains “intelligent management” over the shipping lanes.
There are also reports that Iran still intends to push for transit fees as part of a final 10-point proposal.
Furthermore, the 10-day truce in Lebanon is extremely fragile, and any resumption of hostilities there could quickly see the Strait of Hormuz closed again.
For now, the market is choosing to ignore these “fine print” risks in favor of the immediate relief provided by the drop in oil.
