Oil prices fall, global stocks and bonds rebound together, and gold returns to $4700! Ceasefire expectations ignite optimism, but the shadow of high oil prices has not dissipated.

After the signal of possible end to the conflict in the Middle East by the US and Iran, oil prices dropped sharply, gold rose back above $4700, and the stock and bond markets rebounded. However, the uncertainty remains regarding when the Strait of Hormuz will reopen, and the specter of high oil prices still looms over the global markets. As of the time of writing, Brent crude oil futures fell nearly 4%, to $99.83 per barrel, back below $100 per barrel; WTI crude oil futures fell over 4%, to $96.98 per barrel. Gold spot rose by 1.10%, to $4718.67 per ounce, back above $4700. The US Dollar Index (DXY) fell by 0.33%, to 99.64. In the bond market, as the fall in oil prices eased concerns about inflation, market bets on major central banks tightening monetary policy this year were lowered, leading to significant declines in yields of US, UK, and several European government bonds. The two-year US Treasury yield fell by 5.5 basis points, to 3.744%; the ten-year US Treasury yield fell by 4.3 basis points, to 4.268%. Government bond yields of the UK, France, Italy, and other Eurozone countries all fell by 10 basis points or more. The German ten-year government bond yield fell by 6 basis points to 2.94%, its lowest level since March 18. The signs of easing tensions between the US and Iran US President Trump reportedly told the media on March 31st that the US could end its military actions against Iran in two to three weeks. Trump said, "We'll be leaving soon." "I think probably two to three weeks. We'll be leaving, because we have no reason to stay." Trump stated that his only goal was for Iran not to have nuclear weapons, "and that goal has been achieved." He stated that the US military is completing its final tasks, "I think within two weeks, maybe a few more days, we'll be done." Trump also said that if an agreement is reached with Iran, the conflict could be ended earlier. But the US could also end the conflict without an agreement with Iran. "If they want to sit down and talk, that's good. But it doesn't matter if they come or not." Meanwhile, Iranian President Rouhani stated on March 31st that Iran has the "necessary will" to end the war, provided that the other side meets Iran's demands, especially by providing necessary guarantees that there will be no more aggression. According to reports, Rouhani expressed to the European Council President in a phone call that the solution to normalize the situation is to stop the aggressive attacks by the US and Israel. He reiterated that Iran has not sought tension and war at any stage, and has the "necessary will" to end the war. Additionally, the White House announced on March 31st that Trump will deliver a national address at 9 pm Eastern Time on April 1st (9 am Beijing Time on April 2nd) to provide an "important update" on the Iran issue. Recovery of energy supply will still take time Despite Trump's signals that the US may soon end its military actions against Iran and the boost this provided to the stock and bond markets, investors remain cautious. On one hand, Trump has been indecisive in the past about reaching an agreement with Iran and escalating military actions. On the other hand, the US continues to enhance its military presence in the Middle East, indicating the possibility of further escalation of the situation. According to US sources, thousands of additional US troops are being deployed to the Middle East. Two US officials stated that the US aircraft carrier USS George H.W. Bush was deployed that day, planning to move to the Middle East with three destroyers. The aircraft carrier strike group consists of over 6,000 sailors. The aircraft carrier will join the USS Abraham Lincoln and USS Gerald R. Ford aircraft carrier strike groups, indicating that the US may deploy three aircraft carriers in the region simultaneously. According to two anonymous US officials, thousands of soldiers from the US 82nd Airborne Division have also arrived in the Middle East. Furthermore, according to reports, Arab officials revealed that the UAE is preparing to assist the US and other allies in controlling the Strait of Hormuz by force. A UAE official stated that the UAE suggested forming an alliance with the US, Europe, and Asian countries to control the strait by force. Military analysts believe that any such action would not only require control of the waterway itself but also about 100 miles of land along the strait, which may require the use of ground forces and further escalate the situation. Even if the war ends within the time frame set by Trump, it will still take time for shipping through the crucial Strait of Hormuz to resume normal operations and for some energy infrastructure damaged during the conflict to recover production. Analysts at ING stated in a report, "Following the news that conflicting parties are communicating, the market will focus on whether these developments will push the situation towards a path of easing. The remaining question is, given the destruction that has already been caused, when will energy supply completely recover." Global stock and bond jubilation masking deep-seated concerns about high oil prices Despite the sharp rise in global stock markets, deeper concerns about the global economic outlook are being overshadowed, which may shorten the duration of this rebound. A signal that the rebound is based on a shallow foundation rather than investors betting heavily on a recovery is that trading volumes remained subdued in most Asian markets on Wednesday. For example, the trading volume of the South Korean Kospi index was about one-fifth lower than the average level of the past month. Investors are increasingly assessing the impact of sustained high oil prices, as the market expects that disruptions in shipping through the Strait of Hormuz may continue to weigh on fundamentals. This crucial waterway, which carries about one-fifth of the global oil and gas exports, is still effectively closed to most vessels. Trump had previously stated that even if the Strait of Hormuz remains largely closed, he would be willing to end military actions against Iran. Vishnu Varathan, head of macroeconomic research at Mizuho Bank, stated, "Even with the US withdrawal, there may still be disruptions to shipping through the Strait of Hormuz." He pointed out, "Ending the war without ensuring the safety of the Strait of Hormuz or achieving a broader peace will inevitably allow the impact to persist, and impose a high economic cost on the global, particularly Asian, economies." Although Brent crude oil fell below $100 per barrel for the first time in a week, it is still about 37% higher than before the start of the war. Based on the Brent crude oil futures curve, the market expects the average oil price for the next year to be around $85 per barrel, higher than the approximately $70 per barrel on the day before the US-Israel attacks on Iran. Higher energy costs pose a threat to corporate profits the anticipated energy supply shock is expected to squeeze profit margins, weaken pricing power, and drag down demand, while also potentially changing interest rate expectations. As earnings season approaches and corporate earnings reflect the impact of the war for the first time, there are still many potential catalysts that could hinder the rebound. Homin Lee, a strategist at Longo Bank in Singapore, stated, "The impact of the Middle East war has not yet been fully reflected in the market's consensus earnings expectations. If shipping through the Strait of Hormuz cannot significantly recover after these more positive signals, market expectations for consensus earnings could dramatically accelerate." Matthew Haupt, fund manager at Sydney Wilson Asset Management, pointed out, "The market will assess the damage to demand caused by uncertainty in the next stage, as well as the ability of companies to pass on the increased cost of inputs."