Good news hit the markets hard on Monday and Tuesday—the US and Iran confirmed they’ll sign a ceasefire agreement this Friday. Stocks rallied worldwide, and oil prices took a nosedive. But economists and market analysts are waving caution flags: the deal isn’t signed yet, and there’s plenty that could go wrong. The three-plus months of the Strait of Hormuz being shut down have left deep, slow-to-heal wounds on the global supply chain. Recovery could take months, maybe longer.
Ships queuing in the Strait of Hormuz on June 16. (Photo: IC)
On Monday, the U.S. stock market closed higher, echoing the gains seen across Europe and Asia the day before. The S&P 500 jumped 1.65%, and the Nasdaq surged 3.07%. Asian markets followed suit on Tuesday—South Korea’s KOSPI rose 2.11%, and Japan’s Nikkei edged up 0.13%. The Associated Press reported that investors are hoping this ceasefire can truly resolve a conflict that’s been fueling global inflation.
London’s Brent crude futures slipped 1.3% to $82.09 a barrel by late afternoon Tuesday. That’s still above the pre-conflict price of around $70, but way down from the $100-plus highs of a few weeks ago. As oil prices cool, inflation fears are easing too, pushing back expectations for major central banks’ next rate hikes. The market now sees the Fed’s next move coming in April 2027 instead of January, and the Bank of England’s in December instead of November.
Despite the upbeat mood, analysts remind us the deal isn’t signed yet. There’s still a lot of uncertainty about how it’ll be enforced, and markets haven’t fully cleared the risk warning.
You can see that caution in how safe-haven assets are behaving. CNBC reported that gold prices are acting like a “funny outlier.” While risk appetite has bounced back, gold hasn’t fallen off a cliff like you’d expect if geopolitical fears were fading. London spot gold was trading at $4,323.50 an ounce on Monday. At one point, New York gold futures spiked 2.78% to $4,356.80 an ounce. CNBC quoted investment insiders saying that normally, when risk appetite returns, people dump gold. But it’s still hovering around $4,300, which shows the market doesn’t fully trust this agreement.
Still, the overall take on the US-Iran deal is positive. That said, many analysts are now turning their attention to the economic “aftermath” of the conflict. Bloomberg reported that the International Monetary Fund remains “highly vigilant” about the impact the Middle East conflict has had on the global economy.
More than three months of fighting and a closed shipping lane have dealt a serious blow to the real economy—one that won’t heal overnight. Asian economies are taking the hardest hit. The New York Times analyzed that Asia, the region most affected outside the Middle East, relies heavily on energy and commodities shipped through the Strait of Hormuz. Over the past three-plus months, many Asian currencies have weakened sharply, inflation has risen, and supply chain bottlenecks have constantly choked industrial production. Even if the waterway reopens, the shockwaves from the crisis will ripple through until the end of the year—or longer.
Wu Rongwu, vice chairman of Wood Mackenzie’s Asia-Pacific branch, a global energy research firm, said that every day the strait stays closed, the economic impact grows exponentially, spreading up and down the supply chain. The collateral damage can’t be quickly undone. Developing economies that depend heavily on Middle East energy—like Pakistan, Vietnam, and the Philippines—are suffering the most. The Philippines has even declared a national energy emergency and is forcing energy cuts. Wealthier countries like Japan and South Korea used their financial reserves and strategic stockpiles to cushion the initial blow, but they can’t escape the pressure of currency devaluation from skyrocketing oil prices. Only by resuming shipping can they gradually fix the shortages.
The long repair cycle for supply chains is the bigger, deeper challenge. First, just getting shipping back to normal takes months. If the market worries the conflict might flare up again, or if ship insurance isn’t solid, the recovery could drag out even longer.
And fixing different supply chains is way harder than anyone expected. The hit to the global fertilizer supply chain is already threatening food security. Five major exporters—Iran, Saudi Arabia, Qatar, the UAE, and Bahrain—together supply more than a third of the world’s urea. That disruption has already messed up the peak farming season in Southeast Asia from May to July. Economists warn that if the supply interruption eats into planting seasons, crop shortages will become a serious food security issue. And this impact has a lag—the big blow to harvests will likely hit hard in the second half of this year.
On top of that, the petrochemical supply chain will take even longer to recover. Right now, Japanese and South Korean companies are struggling with a shortage of naphtha, a byproduct of crude oil refining that’s used to make things like plastic wrap and food packaging. On top of that, other commodities like helium and liquefied petroleum gas are running low, causing problems that range from household gas supply to running medical imaging equipment.
