UK Stocks Struggle Despite US-Iran Deal

Global equities surged after a tentative deal was announced, but as the days have ticked by and more details have emerged, markets have struggled to find new momentum despite falling energy prices.

The Key Points Affecting the Market

• The FTSE 100 is in a holding pattern after the US-Iran deal leaves some market uncertainty over crude, and the FOMC decision weighs on risk appetite.
• Lower crude prices weigh on oil majors, and domestic political issues weigh on utilities.
• Market reaction to the deal is muted after a few days to price it in, and uncertainty remains about how quickly the oil market will rebalance and whether prices will return to pre-war levels.

Will the Deal Last?

Markets have become increasingly nervous this week amid growing doubts about a tentative deal between the US and Iran and a more hawkish-than-anticipated Fed. On Wednesday night, both the US and Iranian presidents signed the much-anticipated deal that would extend the ceasefire by 60 days and reopen the Strait of Hormuz. Originally, the signing was scheduled for Friday, but now delegations from the countries will meet in Geneva to discuss pending issues, such as Iran's nuclear status. The full text of the deal was released soon after and was practically identical to a version leaked a couple of days earlier, preventing a major surprise for the markets. However, contention began almost immediately after the signing, as Iran's top negotiator and Parliamentary Speaker Mohammad Qalbaf asserted Iran's right to levy tolls. Trump had just hours before threatened to resume strikes on Iran if they didn't "behave". Meanwhile, Israel and Hezbollah have traded attacks over the last couple of days, even after the deal was announced, suggesting a point of contention that could scuttle the deal.

Oil prices fell, with Brent dipping to $77 per barrel in the aftermath of the signing, contributing to the international benchmark's 25% drop since last month. The most important part of the deal for markets is the reopening of the Strait, with the MOU allowing up to 30 days for traffic to resume at pre-war levels. It also says the US will end its blockade of Iran immediately, but that Iran will "take steps" to reopen the Strait, suggesting that oil flows might not resume immediately. Over the last 24 hours, no new oil tankers have transited the Strait. The US also committed to lifting sanctions on Iran's oil exports immediately (with waivers during the 60-day period and sanctions lifted once a permanent deal is reached). Analysts estimate there are around 150 million barrels of crude waiting to be transported out of the Gulf, but it is still unclear how that will work logistically.