Financial markets are naturally celebrating the news of a potential deal to be signed by the end of the week between Iran and the US. While we see this development as a net positive, we also see a bumpy road towards normality and some scenarios where the deal falls through.
The facts: The tentative bilateral agreement between the United States and Iran, reportedly to be signed this Friday 19th June, represents a critical juncture for global geoeconomics, geopolitics and financial markets, including oil markets. Arriving after nearly two months of halted military exchanges, this potential Middle East deal signals a significant, albeit preliminary, step toward peace.
Many unknowns: While this potential deal is still in line with our base case scenario, that we would see limited economic repercussions in 2026 and not beyond 2027, we remain cautious.
For one, we aren’t looking at a final agreement, but a tentative pre-deal. The signature in four days will be followed by another 60 days of negotiation, during which the two parties will have to agree on how to treat Iran’s nuclear material.
Second, there are major questions surrounding the exact enforcement mechanisms for both nuclear parameters and the Strait. Specifically, it remains unknown who will step up to guarantee the Strait, or whether the final signed agreement will effectively hamstring Iran’s military nuclear capabilities.
Third, even if it is signed, we don’t yet have a picture of how oil will flow back to markets, at what pace and at what costs, as shipping and insurance companies need to adjust to a status quo which is very different from the previous.
Base case: A positive muddle-through. Our base case scenario is still a muddle-through, but a materially different status quo versus pre-March. Restoration of unfettered free passage from the Gulf Strait could take months, and shipping companies may have to pay inflated risk premiums for some time. In this scenario, things would cool down over the next few months.
Market Sentiment: It will be inherently positive for both equities and bond markets. Calm markets mean a smoother economy.
Commodities: Oil prices will experience a drop, but they will not likely crash because a necessary inventory rebuild is required.
Inflation & Monetary Policy: Inflation expectations are projected to go down, with actual inflation following downward. Consequently, central banks are expected to become less hawkish.
Reconstruction: The stability will allow for a start to rebuild critical infrastructure and a start to rebuild depleted stockpiles.
Worst case: The deal collapses. We must maintain a non-zero probability that the deal collapses.
Both the US and the Iranian government have a history of unpredictability in negotiations, and four days are a long time in geopolitical terms.
A further 60-day extended negotiation means a large number of factors that could affect the final deal.
Additionally, Israel, a key player in this conflict, seems to have reacted with suspicion, as the party that would be more interested in the details. Any peace that would not explicitly involve Israel could be considered tentative.
In case of an adverse event, we would expect a severe reaction from financial and oil markets, an across-the-board risk-off environment. Bond markets will likely be hurt especially hard if interest rate expectations skyrocket further, limiting fiscal space for emerging and developed markets. We would expect oil prices to rise significantly, and possibly exponentially, as we are reaching critical points in terms of global reserves. However, this will depend on the American presence being maintained at the Gulf.
Ultimately, Gulf countries and shipping companies may decide they would be better off paying a toll fee to Iran if this buys safe passage over the shorter term, until the matter is revisited.