Nobody Knows What Will Happen Next

By Michael Every and Bas van Geffen of Rabobank

Ceasefire

Yesterday, the US and Iran threatened to, respectively, “destroy Iranian civilisation” with “new tools” and other countries in the Gulf with old ones. Ahead of the 8PM deadline that Trump had set for “Bridge and Power Plant Day,” US and Israeli forces reportedly already destroyed some bridges and other infrastructure.

Washington and Tehran struck a last-minute, two-week ceasefire – provided that the Strait of Hormuz is fully reopened. Notably, this was after China leaned on Iran to listen to interlocutor Pakistan, according to the New York Times. That key intervention underlines the global nature of this war beyond energy and related exports, and how it is resolved.

Markets are trading this as a TACO Tuesday. Brent futures are down 14% at the time of writing, Asian equity markets rallied, and futures pricing suggests the same will happen when European and American markets open. And bets of near-term rate hikes evaporated as the truce ends days before major central banks next reconvene to recalibrate their policy stance. 10-year German Bund yields fell 18bp (!)on the open.

Yet, this short-term truce is not a peace deal, and is anyone willing to sail through the Strait as long as the conflict isn’t fully resolved? So, today’s reprieve will be followed by at least two weeks of extended uncertainty – and possibly longer, if both sides agree to extend the negotiations.

Moreover, there is a world of difference between Iran having blinked under US military threats, which would be a huge win for Trump and the US, and the US having blinked in the face of Iranian resistance and oil prices, which would be a massive 1956-style geostrategic defeat for Trump.

In the immediate aftermath of the ceasefire, both headlines and missiles kept flying. Iran hit Israel and a GCC energy site. The US said “an” Iranian 10-point plan is a “workable basis on which to negotiate” (might we have an intractable public version and a more pliable private one to save face?), while Iran’s foreign minister is “considering” the directly opposed 15-point US plan.

And, returning to shipping, Iran claimed it will still take tolls from Hormuz with Oman, adding that only 10-15 ships per day can pass, a tiny fraction of normal flows. Is that the “full reopening” of Hormuz that the US set as a precondition?

Subsequently, an unsubstantiated report claimed that Iran has agreed to most US conditions, including: a permanent commitment not to possess nuclear weapons; handing over enriched uranium to the IAEA; allowing the IAEA to monitor all nuclear infrastructure; a complete halt to uranium enrichment within Iran; reducing the range and number of missiles; immediately ceasing support for militias and proxies in the region; ceasing attacks on regional Gulf energy facilities; reopening the Strait of Hormuz immediately and unconditionally; the lifting of all sanctions imposed on Iran; eliminating the mechanism for reimposing UN sanctions; and US support for the Bushehr nuclear power plant, provided it is under direct American supervision.

Iran’s Supreme National Security Council has stated, “The current negotiations are a national negotiation and a continuation of the field, and it is necessary for all people, elites, and political groups to trust and support this process, which is under the supervision of the Leader of the Revolution and the highest levels of the system, and to strictly avoid any divisive comments.”

Trump claimed “