Geopolitical relief ahead?

The week started with Brent slipping below $86 per barrel as the pause in U.S.-Iran hostilities boosted expectations that the Strait of Hormuz would remain open. Renewed discussions about ending the Russia-Ukraine conflict may also have helped sentiment. 

Are we finally getting closer to peace? 

Probably not yet.

Starting with Friday’s TACO, when the U.S. president paused new strikes against Iran, this could be just a temporary break before tensions flare up again, especially given the rhetoric: “If we don’t get 100% of what we want from Iran, we will absolutely consider resuming a full-scale war.”

If that happens, global equity markets, including the S&P 500, Nasdaq, and Dow Jones, would likely feel the impact, as another energy shock could push inflation higher.

And while IEA member countries still hold more than 1 billion barrels of government-controlled emergency oil reserves, a major escalation in the Middle East would likely draw them down quickly. Once the conflict ends, those reserves would need to be rebuilt, helping oil prices stay higher. 

As for the Russia-Ukraine conflict, while the U.S. president remains optimistic about a possible settlement, there is still little evidence that peace is getting closer. Russia insists negotiations can begin only after securing full control of the Donbas region and no longer appears willing to discuss territorial concessions in Sumy and Kharkiv. Ukrainian strikes on Russia’s logistics hubs and oil refineries are not helping either. 

Still, if by some miracle the parties genuinely move toward ending these conflicts, it could trigger a correction in oil prices and lower expectations for further monetary tightening by central banks.

That said, although the base case is that the Federal Reserve keeps rates unchanged on Wednesday, Citadel Securities analysts are forecasting a surprise rate hike at the Fed’s July 29 meeting, arguing that “a move this week would have a greater impact than waiting until September because it would reshape expectations about how the Fed responds to inflation.”

If they’re right, U.S. equities could take another hit.. The question is whether this downside will last or, as usual, markets will recover after a few days of selling as investors convince themselves the worst is over.