Markets that had rallied on hopes of a diplomatic pause between Washington and Tehran were forced to reassess as differing views on the scope of the newly negotiated two-week ceasefire emerged. The disagreement has contributed to fresh volatility across energy, equity and currency markets as the Strait of Hormuz remains effectively closed to most commercial shipping.
Brent and WTI crude rose again on Thursday amid the renewed uncertainty, at one point topping $98 a barrel before easing back slightly. Although these levels sit below the peaks reached earlier in the week, the uptick in oil was sufficient to stall the prior day’s global equity advance. Regional benchmarks in Asia, including Japan’s Nikkei and South Korea’s KOSPI, slipped after a run of multi-day gains, while European shares opened lower and U.S. futures signaled further weakness before the bell.
In currency markets the U.S. dollar traded broadly flat as investors sought clarity on whether the ceasefire would hold. The Japanese yen relinquished some of its earlier gains and was trading at approximately 159 per dollar, reflecting the risk-off tilt in global FX flows.
Ceasefire ambiguity and the Strait of Hormuz
Central to market concern is the continued effective closure of the Strait of Hormuz. Iranian coastguards issued warnings that vessels transiting without permission could be "targeted and destroyed," and Tehran has signaled it may impose a toll on ships navigating the waterway. These developments underscore how control over maritime routes has emerged as a tangible lever in the conflict, with daily shipping traffic through the strait reportedly down to less than 10% of its historical average since the onset of the U.S.-Iran war.
Complicating the picture, Iran has asserted that ongoing Israeli strikes in Lebanon breach the ceasefire's terms. While reports indicate that peace talks are still slated to begin over the coming weekend, Iran’s lead negotiator described proceeding as potentially "unreasonable." At the same time, President Trump issued a new series of military threats. Taken together, these signals have left investors wary that the ceasefire may not represent the de-escalation markets had anticipated.
Implications for inflation and policy expectations
The geopolitical-induced move higher in energy prices has resurrected concerns about an inflationary shock. That risk has contributed to a moderation in the rally for U.S. Treasuries seen on Wednesday. Market participants are also focused on domestic U.S. data that could influence central bank thinking. Due later in the session is the February personal consumption expenditures (PCE) report, which is expected to show a 0.4% increase in U.S. prices for a second consecutive month - a projection that does not yet account for the most recent energy price jump.
Minutes from the Federal Reserve’s most recent policy meeting, published earlier in the week, revealed internal division among policymakers. Some officials were reportedly leaning toward a rate hike as the next move, while "many participants" still favored rate cuts. Most participants also recognized potential risks to economic growth stemming from the war, suggesting that further easing could be warranted if the conflict markedly undermines activity.
What to watch today
- U.S. February PCE inflation data - 8:30 a.m. EDT
- Weekly jobless claims - 8:30 a.m. EDT
- Final Q4 GDP - 8:30 a.m. EDT
- U.S. 30-year bond auction - 1 p.m. EDT
These U.S. releases and the auction will help markets gauge near-term inflation pressures, the labor market backdrop and demand for long-term government debt amid heightened geopolitical risk.
Market takeaway
The combination of an effectively closed Strait of Hormuz, conflicting interpretations of the ceasefire, and continued regional military activity has damped the relief rally that emerged earlier in the week. Energy markets have been the most directly affected, but the ripple effects have reached equities, currencies and fixed income as traders reassess the likelihood of a sustained de-escalation and the potential inflationary consequences of higher oil prices.
Given the present ambiguity around the ceasefire’s scope and enforcement, and with key U.S. economic data due, market participants are facing a period of heightened uncertainty that could influence monetary policy expectations and sectoral performance in the near term.
Correction note: If further clarity emerges on the ceasefire terms or the status of shipping through the Strait of Hormuz, market conditions may evolve rapidly. The details provided reflect available reporting on the situation and market reactions at the time of publication.