Markets Potentially at a Critical Turning Point
It is reasonable to assume that President Trump has also come to recognize that the situation surrounding oil, helium, fertilizers, and other key commodities is becoming increasingly critical. If the Strait of Hormuz remains closed for another four to six weeks, physical shortages are likely to emerge, driving prices sharply higher - along with inflation and interest rates. Should this occur, Republicans would almost certainly lose their Congressional majority after November.
For Trump this would be highly problematic, as he still aims to advance a substantial political agenda, something that cannot realistically be achieved within only six months. He therefore has a strong incentive to reach a rapid agreement with Tehran, allowing oil prices to decline rather than continue escalating.
Tehran, however, is likely to view the situation from the opposite perspective and may prefer to keep the Strait of Hormuz closed for the time being. From Iran’s standpoint, allowing oil prices to rise further and placing additional pressure on Western economies could strengthen its negotiating position and extract greater concessions from Washington. Naturally, Iran itself would also suffer further economic damage, but this is unlikely to be a decisive concern for the ruling regime - even in the event of renewed military strikes.
The difficulty is that both parties have very limited room for compromise on issues they regard as essential. Trump seeks to prevent Iran from developing nuclear weapons capability, while Tehran considers such capability fundamental to Iran’s regional influence and to the survival of the current regime.
Our assessment is that Trump understands his negotiating position may weaken significantly in the coming months. As a result, he is likely to make every effort in the coming weeks to secure a rapid agreement with Iran and reopen the Strait of Hormuz. At the same time, he is also likely aware that Tehran currently has little incentive to cooperate. This leaves two possible approaches: either compel Iran through military pressure, or offer terms sufficiently attractive that Tehran would find them difficult to reject.
Neither option, however, is straightforward. Renewed military action is highly unpopular among American voters and would likely push oil prices substantially higher, potentially damaging Republican electoral prospects. Conversely, offering Iran highly favorable terms and rushing toward an agreement may also prove ineffective, as Iran has repeatedly experienced situations in which agreements with Washington were later abandoned or reversed.
Conclusion
According to Trump, intensive negotiations are currently underway. That is likely accurate, as otherwise he would need Congressional approval to continue military operations.
Nevertheless, we fear that physical shortages and higher prices may emerge before genuinely serious negotiations begin. As a result, any agreement may ultimately come too late to provide Trump with meaningful political relief. His remaining option would be to threaten Tehran with overwhelming force, although this is unlikely to have a major impact on the regime, which understands the domestic political sensitivities surrounding military escalation in the United States.
One potential policy response available to Trump, should prices remain elevated or continue rising, would be to offset the impact on American consumers through tax reductions. However, such measures would likely trigger negative reactions in both bond and equity markets, as they would further expand an already excessive government deficit.
Finally, it is of course possible that this assessment proves incorrect and that free passage through the Strait of Hormuz is restored in the near future, leading to a meaningful decline in oil and other essential commodity prices.
In that scenario, lower interest rates, a weaker U.S. dollar, higher gold prices, and rising equity markets could reasonably be expected - potentially driving stock markets to new highs.
For the time being, however, our outlook remains tilted toward the opposite scenario.
