Ceased Ceasefire?

By Bas van Geffen, Senior Market Strategist at Rabobank

There has been little progress in the US-Iran peace negotiations over the past weekend. In fact, it feels like the two sides have been walking backwards as the ceasefire is faltering. 

The US and Iran are still at odds over the frozen Iranian assets, which Iran wants released as part of any deal. But, yesterday, President Trump said that he will not unfreeze any amount of Iranian assets, nor lift sanctions, immediately after a deal is closed: “If they behave, if they do a good job, we start talking” about unfreezing these assets, he said.

And, if it is up to the US Treasury, there may be few assets left by the time Trump is willing to talk. The Financial Times reports that Treasury Secretary Bessent is considering using the Iranian assets to pay for the rebuilding of Gulf countries that were hit by Iranian attacks. So, we’ve now moved from “the US and Gulf countries help with the reconstruction of Iran” to “Iran pays to rebuild the Gulf countries.”

On top of that, new attacks put further pressure on the negotiations, and on the fragile ceasefire that was tacitly extended while negotiations are ongoing. US Central Command reported it took down two Iranian drones that threatened marine traffic near Hormuz, after Iran also fired missiles at Kuwait on Wednesday and at Bahrain on Friday. The US, meanwhile, has struck Iranian radar and surveillance sites.

Fighting between Israel and Hezbollah is also still ongoing. Defence Minister Katz said the country’s air force had launched a strike on a command center in one of Beirut’s suburbs, in response to Hezbollah’s continuing attacks on Israel. 

That’s another red line for Iran, which has already retaliated overnight. This remained limited to a tokenistic firing of five missiles. Nonetheless, it’s the first time since the ceasefire that Iran directly targeted Israel. 

President Trump called on Netanyahu to refrain from further retaliation. However, this morning, the Israeli Prime Minister announced that the military had struck targets in western and central Iran – including a petrochemical facility. 

This may be more about saving faces – Netanyahu wanting to project strength in the region, and Trump trying to salvage his peace deal – than an actual split between the US and Israel. Prior to the latest attacks, Iranian negotiator Qalibaf had already stated that the US’ greenlighting of Israel's strikes on Lebanon made US assets in the region a legitimate target.

Trump may be trying to salvage what there is to save, but can we really still talk of a ceasefire? The Houthis are now saying that they will close the Red Sea for maritime trade with Israel, effectively broadening the conflict. For now, Israel is singled out as the target, but the move adds to the risk of a broader blockade of the key passage – though Iran must know that that would certainly cause global backlash.

Unsurprisingly, energy futures are trading higher after a turbulent weekend. Brent futures are up almost 5%, to $97.50/barrel. This is spilling over into broader sentiment as well. Asian equities are down, led by a 4.3% decline in the Nikkei 225. The risk-off sentiment stacks on top of some unwinding of the AI trade last week, and concerns that a stronger US payroll report might force the Fed to tighten rather than ease. European equity futures indicate a loss of around 1.5% on the open. Likewise, rates markets are under pressure. 10y Bund yields are currently 3bp higher on the day.