Middle East truce lifts markets, but tensions persist

In focus today

• Focus remains on energy markets, as tensions in the Middle East continue to weigh on oil supply disruptions and market sentiment.
• From the US, February PCE data and final Q4 GDP are due for release in the afternoon. While the PCE is the Fed's preferred measure of inflation, the pre-war data will likely gather less attention than usual. 
• The Bank of Poland (NBP) is widely expected to keep the key rate unchanged at 3.75% at today's meeting. Although Governor Glapinski has previously hinted that there might be the odd cut left in store for NBP, the Board has been unanimous over the last month in communicating that for the time being, a wait-and-see approach is to be preferred. And the recent ceasefire deal between the US and Iran is unlikely to have changed that, given the remaining uncertainties and its likely brittle status. 

Economic and market news

What happened yesterday

Global markets breathed a sigh of relief as Brent crude fell 14% to USD 95/bbl and equities surged to one-month highs following President Trump's announcement of a two-week ceasefire late Tuesday. However, the truce has failed to completely halt fighting across the region. Israel launched heavy strikes on Lebanon, while Hezbollah retaliated with rocket fire into northern Israel. Iran targeted Gulf neighbours' critical oil and power infrastructure, adding to the volatility. Confusion over the terms of the ceasefire has emerged, with Iran believing it included Lebanon, while the US and Israel maintain it does not. The oil market has reacted with relative calm, suggesting that reported damages may be manageable for now. That said, Asian markets turned more cautious on Thursday, with Japan's Nikkei flat and South Korea's Kospi down 0.4% after sharp gains the previous day. Brent futures also edged up slightly to USD 97/bbl. The Strait of Hormuz remains blocked, though Iran has indicated it could reopen later this week subject to further agreements. Markets are closely watching for signs of increased traffic through the strait in the coming days.

In the US, FOMC minutes from the March meeting revealed a growing openness among policymakers to potential rate hikes, as concerns about persistently high inflation, driven by the war-related oil shock, outweighed earlier expectations. While the Fed held rates steady at 3.50-3.75%, several officials cited the risk of prolonged above-target inflation and its impact on core price trends. Despite this, most participants still viewed rate cuts as the baseline scenario, anticipating that the economic fallout from the Middle East conflict could weaken growth and labour markets.

Equities: Global equities rallied sharply yesterday in the wake of the Iran ceasefire headlines, leaving global benchmarks just ~2% below all-time highs and back in positive territory year-to-date. Unsurprisingly, the move was characterized by a strong cyclical rotation, while energy stood out as the clear underperformer. At the same time, minimum volatility significantly lagged; in fact, min vol is now the worst-performing factor since our latest strategy report in early March, standing in stark contrast to the heavy flow of geopolitical risk over the past month.

Notably, the rebound dynamics show a clear reversal pattern: the strongest moves were seen in Asia and Europe, and at industry level, semiconductors outperformed energy by ~15% yesterday alone. While US moves were more muted, it is worth noting that yesterday marked the sixth consecutive positive session for the S&P 500.

This morning, with uncertainties around how the ceasefire will evolve, Asian equities are giving back some of the gains. European and US futures are also modestly lower.

FI and FX: EUR/USD initially rallied on the ceasefire, but with stirring doubts regarding the longevity of the deal we saw the greenback slowly crawl back, as well as equities softening a tad and risky assets in general retrace some of the earlier moves. The SEK had a stellar first half of the session, with EUR/SEK briefly printing 10.75, before turning 10 figures higher in the latter half, currently sitting close to 10.90. Also, US treasuries saw partial reversals of the initial ceasefire rally, with a modest bear-flattening of the curve, supported a slight hawkish lean to the March FOMC minutes. The NOK failed to capitalize on the rallying risk sentiment, weighed down by the decline in energy prices, highlighting the tug-of-war that is likely to dominate the NOK over the coming weeks.