US President Donald Trump extended indefinitely the US ceasefire with Iran on 21 April, citing internal divisions in Iran. This sudden, last-minute, change of mind after setting various deadlines with military threats showed that Trump blinked first, in my view.
Remember, Iran rejected all 15 conditions that Trump set out in early April for negotiation and countered with their 10 conditions (with ‘red lines’).1 Then within 48 hours, Iran flew to Pakistan, Omen, and Russia for face-to-face meetings about the war, with the Americans totally shut out.
Then Trump called for ceasefire and negotiation. Crucially, he was receiving Iran’s ‘red lines’ – notably nuclear conditions and the future of the Strait of Hormuz – through Pakistani intermediaries. This is very telling – a world superpower is getting Iran’s terms passed through a third (developing) country. If this not TACO (Trump Always Chickens Out), what is it?
Granted, there is an alternative view that the ceasefire is a Trump tactic to buy time for replenishing America’s ammunition and deploy more troops. If this were true, the current risk-on trade would be temporary. Escalation later would reverse market sentiment. No one knows the timing for this.
Let’s live with it
If the 2018-19 US-North Korea de-nuclearisation talks, under Trump’s first presidency, were any guide, my guess is that this US-Iran conflict will be allowed to lapse over time. Both sides will get on with life albeit in an unstable geopolitical equilibrium.
Following many high-profile negotiations, with Trump employing his on-again off-again mercurial tactics, US-North Korea negotiations have collapsed into a long-term stalemate. North Korea has continued its nuclear programme which is estimated to have developed 150 nuclear weapons. The world has lived with this as if nothing had happened.
This time around, the good news of the ceasefire extension is that it will provide a much-needed relief to the global oil supply if the Strait of Hormuz is eventually re-opened. But the bad news is that reopening the Strait does not mean energy supply and prices will return to normal quickly.
Let us first assess the incentives for both sides to hold the ceasefire.
Incentive for negotiations
There are pressures on both sides to prevent escalation, assuming rationality prevails.
Despite its firm stance, Iran cannot risk a regime destruction due to both the US military attacks and rising domestic discontent that was already elevated before the war. It makes no sense for Iran to provoke Trump to intensify the US assault to destroy its civilian infrastructure and trigger an economic collapse.
Meanwhile, public support in the US for the conflict and Trump’s approval ratings are weakening. The November 2026 midterm elections is limiting Trump’s manoeuvring room because his re-election was centred on reducing inflation. However, rising petrol prices due to the Iran war are eroding domestic purchasing power after years of above-target inflation. The Republican Party might get wiped out in the midterm elections if the energy crisis grows.
This brings up another question: Why do higher oil prices hurt the US when it is a net oil exporter?
US is not immune
This is because oil is a globally traded commodity. Its prices are set by international demand conditions, not just domestic supply. The Middle East conflict has disrupted the region’s supply, creating a global shortage. Domestic US producers sell to the highest bidder globally, so local prices rise to match global prices. And there is no petrol price control in America as there are in China and some other countries.
There’s also an issue of oil refinery. The US mainly produces light, sweet crude. Many of its refineries, especially on the Gulf Coast, need to import heavy, sour crude from the Middle East for processing. The disruption in these supplies causes a shortage, driving up costs for US refined products like petrol.
Finally, there are limits to how quickly the US can ramp up oil export shipments to fill the global gap. That leaves the market tight and prices high, which then feedback to push up the US domestic oil prices and, hence, inflation.
Now the bad news
Even if the worst of this conflict is over and oil prices have peaked, the ceasefire will not fully reverse the damage to the world economy. Reopening the Strait will not undo the damage caused by Iranian strikes on GCC oil and natural gas production facilities.
Crucially, the US-Iran truce is still fraught with uncertainty, despite the incentives on both sides not to escalate tensions. It does not eliminate the risk that the Strait could be weaponised as a chokepoint for global energy supplies at any time. So, energy supply and price will not normalise quickly.
Damaged oil and natural gas infrastructure and port operations need considerable time to rebuild. Even if the Strait is fully reopened, restoring oil production and flows to pre-war levels will take months. Furthermore, shipping and insurance costs will remain higher than pre-war levels for some time, adding to oil prices.
Investors should not underestimate the lasting economic pains from the US-Iran war, even if the worst is behind us. Caution and risk management are still warranted.
A “what if” positive situation
What if the Middle East tensions de-escalate from here?
Markets have not priced in this situation at this point. But if it does happen, that means markets have currently priced too little central bank interest rate cuts (or too many rate hikes in the cases of the BoE and ECB) this year. This also means that risk appetite will rise quickly. For equity investors with higher risk tolerance, diversification is key as non-US markets are less expensive.
Bond yields, while higher than a year ago, are stuck in a trading range (Exhibit 1). This will likely persist a while longer as market sentimant swings between de-escalation and escalation of war risk, and between growth and inflation fears.
The war will likely increase investment in the electricity (energy) sector. Power outages have become more frequent and are global issues. Electricity demand is soaring when the world’s grids are increasingly at risk of collapse due to climate change and extreme weather events, ageing and overloaded infrastructure.
Rising electricity demand is driven by:
(1) the electrification of transportation, industrial processes, buildings, and homes; and
(2) increased demand for energy-hungry generative AI and Bitcoin mining.
The Iran war has highlighted the oil dependency and the necessity to speed up the shift to alternatives energy options.
End.
[1] The Iranian conditions and ‘red lines’ include notably total sanctions removal, US military withdrawal from the region, war indemnity by the US, and retention of uranium enrichment capabilities.
