Global stock markets took a breather on Wednesday while oil dipped below $100 a barrel as a two-week Middle East cease-fire was agreed and hopes arose for a resumption of oil and gas flows through the Strait of Hormuz.
The news capped weeks of market volatility and geopolitical upheaval after U.S. and Israeli strikes on Iran at the end of February pushed tensions to the brink, with Tehran effectively choking off the strategic waterway that typically carries about 20% of the world’s energy supplies.
U.S. President Donald Trump on Tuesday announced the cease-fire less than two hours before his deadline for Iran to reopen the strait or face devastating attacks on its civilian infrastructure. Iran said it would cease counterattacks and provide safe passage through the waterway if attacks against it stop.
The market rally revived investor talk of the "TACO trade" – or "Trump Always Chickens Out" – after past policy reversals, although some noted the damage to energy infrastructure across the Middle East over the month-long conflict would inflict long-term strains on the global economy and the prospect of a lasting peace was far from certain.
Market reaction was swift and dramatic, as oil prices plunged and stocks from Asia to Europe rallied.
"It's a huge relief to see that we finally have a cease-fire between the U.S. and Iran," said Nabil Milali, portfolio manager at Edmond de Rothschild, adding he believed Trump had calculated that further escalation would likely backfire.
"So he did the only other option he had in front of him, which is a unilateral TACO," he said.
Oil prices would likely remain "structurally higher" for a while, he added.
Brent oil futures were last down 13.7% at $94.29 by midday, while U.S crude futures were down 16% at $94.93 a barrel, but were still well above pre-war levels.
European stocks rose 4%, following strong gains across Asian markets. Wall Street futures pointed to gains of 2.7%-3.5%.
The U.S. dollar fell broadly, having been the haven of choice during the tumult, with the index against other major currencies easing to 98.842.
"Markets can worry about the complexities later. For now, they've been given the green light to rally," said Matt Simpson, a senior market analyst at StoneX.
Two weeks of relief
The six-week conflict had sent oil prices soaring, reignited inflation fears and thrown the global rates outlook into disarray, forcing governments and companies to scramble for cover against a sudden energy shock.
Trump's social media announcement on the cease-fire marked an abrupt reversal from hours earlier, when he issued an extraordinary warning that "a whole civilization will die tonight" unless his demands were met.
Beyond the immediate relief, investors remain keen to see whether the cease-fire leads to a broader resolution before placing major bets.
"Does it mean people are going to take new risks? No, it doesn't," said Martin Whetton, head of financial markets strategy at Westpac. "It would have to actually be a lasting peace (to change things). People aren't actually taking risk."
Gold prices climbed 1.7% to $4,783 per ounce.
U.S. Treasuries surged after the announcement, with traders putting the prospect of rate cuts from the Federal Reserve later in the year back on the table, although doubts about whether oil prices will go back to pre-war levels kept enthusiasm in check.
The yield on the benchmark U.S. 10-year Treasury note dropped to 4.2438%, the lowest since mid-March, while the U.S. two-year Treasury notes sank to 3.7318%.
Eurozone government bond yields also dropped sharply, as the ceasefire prompted traders to dramatically scale back their bets on future rate hikes from the European Central Bank (ECB).
"The evolution of oil would determine if this rally (in bonds) continues or gets faded, which of course depends on how the negotiations go," said Rohan Khanna, head of euro rates strategy at Barclays.
"In the very short term, it may remove the impulse for the ECB to hike rates in April and the market has repriced that meeting accordingly, but the meeting is still three weeks away, and that's a long time in these markets."