Nobody Knows What Will Happen Next
By Michael Every and Bas van Geffen of Rabobank
Ceasefire
Yesterday, the US and Iran threatened to, respectively, “destroy Iranian civilisation” with “new tools” and other countries in the Gulf with old ones. Ahead of the 8PM deadline that Trump had set for “Bridge and Power Plant Day,” US and Israeli forces reportedly already destroyed some bridges and other infrastructure.
Washington and Tehran struck a last-minute, two-week ceasefire – provided that the Strait of Hormuz is fully reopened. Notably, this was after China leaned on Iran to listen to interlocutor Pakistan, according to the New York Times. That key intervention underlines the global nature of this war beyond energy and related exports, and how it is resolved.
Markets are trading this as a TACO Tuesday. Brent futures are down 14% at the time of writing, Asian equity markets rallied, and futures pricing suggests the same will happen when European and American markets open. And bets of near-term rate hikes evaporated as the truce ends days before major central banks next reconvene to recalibrate their policy stance. 10-year German Bund yields fell 18bp (!)on the open.
Yet, this short-term truce is not a peace deal, and is anyone willing to sail through the Strait as long as the conflict isn’t fully resolved? So, today’s reprieve will be followed by at least two weeks of extended uncertainty – and possibly longer, if both sides agree to extend the negotiations.
Moreover, there is a world of difference between Iran having blinked under US military threats, which would be a huge win for Trump and the US, and the US having blinked in the face of Iranian resistance and oil prices, which would be a massive 1956-style geostrategic defeat for Trump.
In the immediate aftermath of the ceasefire, both headlines and missiles kept flying. Iran hit Israel and a GCC energy site. The US said “an” Iranian 10-point plan is a “workable basis on which to negotiate” (might we have an intractable public version and a more pliable private one to save face?), while Iran’s foreign minister is “considering” the directly opposed 15-point US plan.
And, returning to shipping, Iran claimed it will still take tolls from Hormuz with Oman, adding that only 10-15 ships per day can pass, a tiny fraction of normal flows. Is that the “full reopening” of Hormuz that the US set as a precondition?
Subsequently, an unsubstantiated report claimed that Iran has agreed to most US conditions, including: a permanent commitment not to possess nuclear weapons; handing over enriched uranium to the IAEA; allowing the IAEA to monitor all nuclear infrastructure; a complete halt to uranium enrichment within Iran; reducing the range and number of missiles; immediately ceasing support for militias and proxies in the region; ceasing attacks on regional Gulf energy facilities; reopening the Strait of Hormuz immediately and unconditionally; the lifting of all sanctions imposed on Iran; eliminating the mechanism for reimposing UN sanctions; and US support for the Bushehr nuclear power plant, provided it is under direct American supervision.
Iran’s Supreme National Security Council has stated, “The current negotiations are a national negotiation and a continuation of the field, and it is necessary for all people, elites, and political groups to trust and support this process, which is under the supervision of the Leader of the Revolution and the highest levels of the system, and to strictly avoid any divisive comments.”
Trump claimed “total and complete victory”, and posted that it’s a “big day for World Peace”, the US will be “helping with the traffic buildup in the Strait of Hormuz,” while Iran can “start reconstruction,” and the US will be “loading up with supplies of all kinds, and “just “hangin’ around” in order to make sure everything goes well,” where “This could be the Golden Age of the Middle East.”
So, the fog of war is still in place even if the fighting might have stopped for now. Nobody knows what will happen next, but the possible spectrum is clear:
Best case: the war is over – though the related Israel-Hezbollah one in Lebanon is apparently not included, according to PM Netanyahu– and other related global tensions could even ease in tandem. (Because the US wins as Iran and others blink.)
Good case: the war is over. (Because Iran blinked.)
‘Good’ case: the war is over. (Because Trump blinked. The knock-on effects aren’t something markets want to consider now, but they aren’t pretty for the dollar or GCC and western assets.)
OK case: the war is paused and Hormuz reopens briefly to give the world economy some breathing room. (Because Iran US blinked.)
Worst case: the ceasefire collapses and the war both continues and escalates to try to get us back to one side backing down - watch US military logistics closely.
In terms of our macro and market scenarios, the latest news leans towards our base case of fighting being over by mid-April with a slow Hormuz reopening – and on US terms. Obviously, if this pause instead leads to more fighting, we move towards our other, more damaging scenarios.
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