The US-Iran peace agreement that lifted global markets last week is already coming under pressure, with delayed negotiations, renewed threats to close the Strait of Hormuz and escalating regional tensions raising doubts about whether a lasting settlement can be reached.
After signing a memorandum of understanding last week, Washington and Tehran were expected to begin negotiations on a permanent peace agreement.
However, Iran postponed talks that had been scheduled to begin on Friday and again threatened to close the Strait of Hormuz following Israeli attacks against Hezbollah in Lebanon, which Tehran claims violated commitments underpinning the agreement.
Mediation efforts by Qatar and Pakistan ultimately persuaded Iran to resume negotiations on Sunday, but economists said the episode highlighted the fragility of the current ceasefire.
Westpac’s latest morning note said the postponement of talks and renewed uncertainty surrounding the agreement had weighed on investor sentiment, with European equities retreating as markets reassessed the outlook for the region.
The bank said negotiations would remain centre stage this week after the episode once again illustrated the fragility of the current status quo.
News of the delayed talks weighed on markets late last week, with the Euro Stoxx 50 falling 0.5 per cent and the FTSE 100 declining 0.4 per cent. Australia’s ASX 200 shed almost 1 per cent and remains about 4 per cent below the levels seen before the US-Iran conflict began at the end of February.
ANZ economists also pointed to growing uncertainty around the agreement, reporting that Iranian media announced over the weekend that the Strait of Hormuz had been closed again and that Tehran had halted peace talks after US President Donald Trump threatened renewed military escalation.
The bank said renewed constraints on traffic through the strategic waterway were likely to keep upward pressure on oil prices.
According to ANZ, hopes that the agreement would quickly restore normal shipping conditions have also begun to fade.
The bank said renewed fighting in southern Lebanon led to the cancellation of planned talks in Switzerland, while several oil tankers approaching the Strait reportedly halted their journeys amid growing doubts over safe passage.
Iran has also flagged that future crossings could require mandatory insurance arrangements.
Energy markets have also reflected the uncertainty as Brent crude climbed back above US$80 a barrel after initially falling below that level as doubts emerged over the agreement, while WTI crude rose 0.6 per cent to US$77.5 a barrel.
Although reports suggest oil flows through the Strait have started to recover, Westpac noted the disruption was enough to place fresh upward pressure on crude prices, underscoring the sensitivity of energy markets to any signs the agreement could unravel.
Against that backdrop, AMP chief economist and head of investment strategy Shane Oliver warned that while the agreement had removed an immediate threat to the global economy, the conflict’s underlying drivers remained unresolved.
“However, Iran’s nuclear program is still not fully resolved (yes it reiterated that it will never produce nukes but it’s been saying that for years), it retains a large stockpile of missiles and retains an ability to support its regional proxies like Hezbollah and Hamas,” he said.
The agreement initially buoyed investor sentiment, helping oil prices retreat from wartime highs and pushing major sharemarkets higher as investors anticipated the reopening of the Strait of Hormuz and the restoration of disrupted energy flows.
AMP said confirmation of the deal and reports that sanctions on Iranian oil would be lifted helped drive gains across global equities, with US shares rising 0.9 per cent over the week while European and Japanese markets reached record highs.
Oil prices also fell sharply following the announcement, ending up less than US$10 a barrel above pre-war levels.
With several of the region’s major flashpoints still unresolved, including Iran’s missile capabilities and its relationships with armed groups across the Middle East, Oliver questioned whether the agreement amounted to more than a temporary pause in hostilities.
“All of which suggests that we are back where we were before the War started with nothing resolved. If anything, Iran is now stronger having shown it can easily stop ships through the Strait of Hormuz.
“So it all begs the question – what has been achieved despite the huge cost of the War? It does look like Iran won. And it could all flare up again after the mid-term elections are out of the way!” he said.
