Oil tumbles below USD 100/bbl on US-Iran ceasefire agreement

In focus today

All focus this morning is on the ceasefire in the Middle East and the impact on energy prices. Markets will closely monitor any information released on expectations for oil and gas flows.

Tonight, the minutes from FOMC March meeting are due for release. The minutes may get less attention than usual as the war in Iran was only in its early stages at the time of the meeting. That said, we will keep an eye out for any forward guidance on the balance sheet operations, which the Fed has lately provided mostly in the minutes. 

Economic and market news

What happened overnight

In the US-Iran war, President Trump agreed to a two-week ceasefire with Iran just two hours before his deadline for Iran to reopen the Strait of Hormuz. Iran agreed to halt attacks and provide safe passage through the strait, while the US and Israel committed to the terms of the truce. Brent crude fell as low as USD92/bbl on the news, but the drop in prices is contingent on the pre-condition that traffic through the Strait of Hormuz resumes. For prices to stabilise at lower levels, oil and gas flows through the strait must pick up again, which remains uncertain. The deal looks fragile, particularly as Iran is allowed to charge fees on ships passing through. Stock markets surged, with S&P 500 futures rising over 2% and European futures up more than 5%, while the US dollar weakened on improved risk sentiment. The war is now in its sixth week, and scepticism remains about whether the ceasefire will hold, as many view it as a trust-building exercise. Significant uncertainties persist, and the oil market and broader markets are likely to stay volatile as they monitor activity from the Gulf.

In New Zealand, the Reserve Bank (RBNZ) kept its official cash rate unchanged at 2.25% during its April meeting, as expected. The central bank highlighted that rising oil and fuel prices driven by Middle East tensions are adding to near-term inflation pressures while weighing on economic growth. The RBNZ reiterated its focus on medium-term inflation, emphasising the importance of containing core inflation, wage growth, and inflation expectations.

What happened yesterday

In the euro area, the April Sentix investor confidence indicator declined to -19.2, its lowest level in a year, reflecting concerns over the war in Iran. The monthly drop is comparable to the sentiment deterioration seen in April last year following Trump's "Liberation Day" and is about two-thirds of the decline observed in March 2022 when the war in Ukraine began.

In Sweden, March inflation surprised on the downside, with CPI at 0.6% y/y (cons: 1.2%), CPIF at 1.6% y/y (cons: 2.2%), and CPIF-XE at 1.1% y/y (cons: 1.5%). Food prices declined -0.7% m/m, more than anticipated, while energy prices fell sharply by -5.3%, driven by milder weather lowering electricity costs after elevated levels in January and February. The data does not yet reflect any impact from the war in Iran, with the lower reading likely attributable to seasonality. Sweden's April services PMI rebounded strongly to 55.7 in March (prior: 48.3), supported by higher order intake and business volumes. Price pressures also rose, presenting a somewhat hawkish signal in contrast to the earlier low inflation print.

In Denmark, the Danish central bank did not sell EUR/DKK in FX intervention in March, where EUR/DKK hit 7.4728. This aligns with our expectation that it will allow the pair to rise to 7.4730-50 range before stepping into the market.

In the US, health insurers rallied after the government announced a 2.48% average increase in 2027 Medicare Advantage payment rates, exceeding the 0.09% proposed in January. The USD 13bn boost is expected to improve margins, with shares of UnitedHealth, CVS Health, and Humana rising in response.

Equities: The ceasefire agreed overnight between Iran, the US and Israel is clearly dominating market action this morning. What we are seeing is a classic "big war/cease fire reversal trade" across asset classes and equities.

In Asia, there is a pronounced cyclical rotation, led by tech, with the semiconductor space up around ~10% this morning. Defensives and low-vol stocks are underperforming, while energy is a clear laggard, down roughly 7%.

We will refrain from going into the details of the various statements from US and Iranian officials leading up to this, but once again this outcome is fully consistent with Trump's well-known negotiation tactics - maximum pressure followed by a "TACO"-style de-escalation. This remains the relevant framework for interpreting developments going forward, also as we approach the expiry of the two-week ceasefire. Importantly, this is only a ceasefire, and a lot can still go wrong, but it goes without saying that this is a step in the right direction. European equity futures are up around ~5% this morning, while US futures are higher by ~2-3%.

FI and FX: With Trump's deadline fast approaching, the US president announced a two-week ceasefire with Iran. This provided an imminent relief for markets, with oil prices collapsing below USD100/barrel, US yields falling by more than 10bp across the curve and EUR/USD rallying towards 1.17. The SEK, which weakened through yesterday's session on the back of lower-than-expected Swedish inflation, rallied sharply on the ceasefire announcement. As for the NOK, which is caught by opposing forces, EUR/NOK remains below 11.20. Although a lot of uncertainty still prevails, especially beyond the two-week ceasefire, risk sentiment seems to have turned and will likely act supportive for the time being.