Oil prices slumped, equities surged, and the dollar weakened on Wednesday after a two-week Middle East ceasefire triggered a sharp relief rally. Moreover, markets responded to expectations that oil and gas flows through the Strait of Hormuz could normalise.
The move followed weeks of volatility after U.S. and Israeli strikes on Iran in late February pushed regional tensions higher. As a result, Tehran effectively restricted the strategic waterway, which typically carries around 20% of global oil and gas trade. U.S. President Donald Trump on Tuesday agreed to a ceasefire with Iran, less than two hours before his deadline for Tehran to reopen the strait or face attacks on civilian infrastructure.
Crude futures dropped around 15% to $96.31 a barrel. Meanwhile, Brent futures slid 13% to $95.36 per barrel. Equity markets rallied strongly, with S&P 500 futures rising more than 2%. Additionally, European futures climbed more than 5%, while the dollar fell broadly after serving as the main safe-haven during the conflict. In Asia, Japan’s Nikkei advanced around 5%. Moreover, South Korea’s KOSPI gained 6%, briefly triggering a halt in trading.
The MSCI Asia-Pacific index outside Japan rose 4%. However, investors remained cautious about taking fresh risk positions until they see sustained stability.
“Does it mean people are going to take new risks? No, it doesn’t,” said Martin Whetton, head of financial markets strategy at Westpac. “It would have to actually be a lasting peace (to change things). People aren’t actually taking risk.” The six-week conflict had pushed oil prices sharply higher and reignited inflation fears. Therefore, it disrupted global rate expectations and forced companies and governments to hedge against energy supply shocks.
Trump’s ceasefire announcement marked a sharp reversal from comments made only hours earlier. Moreover, he had warned that “a whole civilization will die tonight” unless his demands were met. Charu Chanana, chief investment strategist at Saxo, said the next two weeks will be critical for markets. Additionally, she said investor confidence depends on whether negotiations continue and whether insurers and tanker operators restore normal shipping through Hormuz.
“That will determine whether this remains just a relief rally or starts to look more like a durable de-escalation.”
Currency and commodity moves reflect easing risk sentiment
Gold prices climbed more than 2% to $4,812 per ounce. Meanwhile, the Australian dollar rose 1% to $0.7050, while the euro gained 0.68% to $1.16735.
The dollar index slipped to 98.956, hovering near a one-month low. However, some analysts warned that dollar losses could reverse if tensions re-escalate.
Carol Kong, a currency strategist at Commonwealth Bank of Australia, said the conflict’s underlying issues remain unresolved. Therefore, she said markets should expect further volatility.
“We maintain our view that the war will run into June. The implication is dollar losses may prove short-lived.”
Bond markets price in rate-cut potential
U.S. Treasuries rallied after the announcement, as traders brought potential Federal Reserve rate cuts back into focus. However, uncertainty over whether oil prices will return to pre-war levels limited expectations.
The benchmark 10-year Treasury yield fell 9.5 basis points to 4.247%, the lowest since mid-March. Additionally, the yield on the 2-year note dropped to 3.727%.
“The bigger worry is that some damage may linger even with de-escalation,” said Saxo’s Chanana. “The rates story can probably shift from ‘higher for longer because of war escalation’ to ‘cuts may still come, but not as cleanly or as quickly as before’.”
