Morning Markets – Equity markets look through Iran war impact for now, but a turbulent summer lies ahead

The FTSE 100 has opened in green territory today, following the latest news from the US President that ‘Project Freedom’ is to be paused in the hope of finalising a deal with Iran.

Sharing her thoughts with us on where this latest move leaves markets, Lindsay James, investment strategist at Quilter comments:

“Despite the announcement that US efforts to guide neutral ships through the Strait of Hormuz were to be ‘paused’ just one day after it began, oil prices continued to give up some of their recent gains. Brent crude fell to $108 per barrel as investors took encouragement from signals that the US remained determined to stick to the ceasefire.

“Words from President Trump around an agreement with Iran were viewed with some optimism despite Iran later throwing cold water on hopes for a quick resolution. With rationing of jet fuel already beginning in Europe, pressure is mounting for a negotiated outcome. Yet, equity investors continue to look through near-term risks and focus on the positives; a strong earnings season that has lifted expectations for profit growth this year in most regions and signs that the all-important US economy continues to deliver, with better than expected hiring data published yesterday underlining this resilience.

“The UK is as ever in a slightly different situation. Gilts yields have risen sharply, not only mirroring moves seen across the G7 to reflect higher inflation and anticipated base rate hikes, but with an added twist to reflect growing unease as we head into local elections. There are concerns that the resulting leadership will be a shift to the left at a time when the UK’s reputation is still tarnished from efforts by members of the last government to ignore the bond market.

“With the 30 year gilt yield having reached a 28 year high at 5.78%, this forces the Treasury into absorbing higher interest costs at a time when they may also be asked to fund additional giveaways by a possible new leadership team. This could result in weaker fiscal rules or substantially higher taxes, with implications for growth. Neither looks attractive to a lender and has been foreseen for some months by major investors. The Quilter Investor Trends survey, issued in February to major fund groups in the UK, highlighted there was unanimity from fund managers that gilt yields would rise if Keir Starmer was replaced by a more left-wing candidate, as is now being openly discussed. There was also significant agreement (94%) that it would reduce business confidence, damage growth (50%), and reduce Labour’s chances of winning the next election (63%).

“While equity markets remain willing to look through the impact of the US war with Iran – at least while the economy seems able to shrug it off – bond markets, with coupons that do not generally adjust with inflation, cannot. With no concrete signs that a resolution is near, and political winds changing in the UK at the worst moment, this summer looks likely to be a turbulent one not only for airlines but potentially for markets too.”

Susannah Streeter, chief investment strategist, Wealth Club points out that the rally is a result of relief flooding in as US eases off hostilities in Iran conflict saying:

“A dam of tension has eased with relief flooding into financial markets, amid hopes that hostilities will cease in the Middle East, with the Trump administration making conciliatory moves. The Footsie 100 has rallied higher, with optimism replacing pessimism, given the ceasefire looks more likely to hold. The DAX in Frankfurt and the CAC 40 in Paris have also jumped in early trade. Trump’s announcement that Operation Epic Fury has been concluded, has triggered a wave of buying given there’s less of a chance of the situation escalating once more. Relief is starting to seep into the bond markets, with UK gilt yields easing off amid hopes that inflation might not head quite as high if a longer-term resolution can be negotiated.

“Brent crude has been on the descent, but it’s still trading above $108 dollars a barrel indicating that there’s still scepticism around, and concern about how to get so many vital energy shipments moving again with the Strait of Hormuz still effectively blocked. There’s still a big diplomatic impasse to break through, and so for now, the energy crunch is still a harsh reality to navigate.”

Daniela Hathorn, Senior Market Analyst at Capital.com said: “The latest headlines suggesting the US and Iran are closing in on a one-page memo to end the war mark a significant shift in the narrative and are likely to be taken as a clear positive by markets. This is arguably the closest both sides have come to a resolution since the conflict began, and even without a fully detailed agreement, the mere progress toward a framework for de-escalation is enough to alter how risk is being priced.

“In the near term, this development should support a classic risk-on reaction. Oil prices have come under further pressure as the probability of a prolonged supply disruption declines, while bond yields have eased as inflation concerns linked to energy begin to moderate. Equities, particularly outside the US and in more cyclical sectors, will benefit from the reduced geopolitical risk premium, continuing the upside strengthened by the recent earnings season. Markets at this stage do not need a final deal as they tend to move on direction of travel, and this clearly points toward de-escalation.

“However, it is important to stress that this is still a fragile step rather than a definitive resolution. A one-page memo suggests that many key details remain unresolved, and past experience has shown that negotiations can quickly stall or reverse. Internal divisions within Iran, in particular, remain a potential obstacle to a smooth agreement. As such, while this development reduces immediate tail risk, it does not eliminate uncertainty. The broader implication is that markets are likely to lean further into a “glass half full” positioning, continuing to unwind some of the worst-case scenarios that had been priced in. But this also creates asymmetry. As optimism builds, there is less room for positive surprise and greater vulnerability to disappointment. If talks were to falter again, the reversal across oil, equities and rates could be sharp.“