The FTSE 100 leapt higher in early trade on Monday after the US and Iran announced a ceasefire agreement that would see the reopening of the Strait of Hormuz.
‘Let the oil flow!’ Donald Trump wrote in a social media post announcing the agreement that puts Iran and the US back on the same diplomatic terms they were on before the US and Israel launched attacks on Iran in March.
At this stage, the war appears to be a failure from the US perspective, with Iran still in possession of what Trump calls a ‘nuclear dust’, which the US claims could be used to make weapons.
But the objective of capturing the uranium ‘dust’ seems to have taken a back seat to reopening the Strait of Hormuz, as higher oil prices risk economically damaging consequences.
News that oil would start flowing from the Middle East again sent Brent sharply lower, trading at $83.10, down 4.8% for the session.
Lower oil prices translated into higher equity prices, and the FTSE 100 surged in the early minutes of trading before easing back.
“Markets have finally got the news they’ve longed for since the beginning of March as the end of the Iran war is more clearly in sight,” said Russ Mould, investment director at AJ Bell.
“The framework deal is a major step forward to ending the conflict, although it is still not officially signed and remains light on detail. Markets seem cautiously optimistic there won’t be any setbacks to getting it over the line, albeit investors are aware the narrative can change at the click of a finger. A full celebration is off the cards until the ink is dry on the deal.
“Asian and European markets enjoyed a bounce on the news, but the scale of the advance wasn’t as huge as one might have expected.”
Indeed, the FTSE 100 was clinging on to gains at the time of writing, trading just 0.1% higher.
The lacklustre response to the deal in the FTSE 100 can be attributed to losses in BP and Shell, which weighed on the index, as well as market caution ahead of the Federal Reserve and Bank of England interest rate decisions later this week.
BP and Shell fell 3.6% and 4.3% respectively.
Although oil is now ‘flowing’ from the Middle East, inflation still poses a risk, reflected in tepid gains for housebuilders. Persimmon rose 2.5% and Barratt Redrow 2.4%.
Larger gains came from mining companies that displayed the broader ‘risk on’ sentiment in markets sparked by a successful SpaceX IPO last week.
Fresnillo shot up 7% while Antofagasta added 6%.
Nasdaq futures were pointing to a 2% higher open later today. One would expect the mixed response to the US/Iran deal in London to fade into the background as US trading gets underway.