Markets are rushing back into pre-war trades

Investors are dusting off their pre-war playbook after the US and Iran reached an interim agreement that should lead to the reopening of the Strait of Hormuz. Hedge funds are piling back into trades that worked before the conflict, buying everything from short-dated Treasuries and beaten-down Asian currencies to Southeast Asian equities and US consumer stocks, Bloomberg reports. One fund manager said the trade is to go “back to the future” with what worked before the war.

The biggest beneficiaries could be Asian: Hedge funds are turning bullish on oil-importing economies, including Japan, South Korea, and India, wagering lower crude prices will ease import bills and inflation pressures. Even instant-noodle stocks are back on investors’ shopping lists because of their exposure to palm oil prices.

Other sectors stand to gain as well: Investors are also eyeing Middle East-exposed industrials, logistics firms, and shipping companies that could benefit from a normalization of traffic through Hormuz.

Why the optimism? The agreement removes a major overhang for global markets after months of fighting triggered a massive disruption to oil supply. Brent crude fell more than 5% toward USD 82 a barrel after the agreement announcement, Bloomberg reported separately, while Treasury yields and the USD also moved lower as traders pared back expectations for future rate hikes.

A lot still hinges on inflation: “The real test now is the inflationary legacy of this war,” KCM Trade’s Tim Waterer said, while several analysts expect the agreement to trigger a short-term rally rather than a long-term one. “The big question is how quickly this oil relief translates into lower inflation and whether that opens the door for central banks to take an easier stance on monetary policy,” Waterer added.

Not everyone is convinced: The agreement still leaves major questions unresolved, including sanctions relief, Iran’s nuclear program, and the future operation of the Strait of Hormuz. While US President Donald Trump says the waterway will reopen on Friday, analysts warn traffic could take weeks to normalize and inflation expectations “won't reverse overnight,” Aberdeen Investments’ Michael Langham said.

In other words, markets may be pricing the best-case scenario. Pepperstone strategist Dilin Wu said the agreement must still survive Israeli opposition, Iranian hardliners, and a 60-day nuclear negotiation process. Stifel’s Barry Bannister also warned that while oil may fall further in the short term, the lack of detail in the agreement means the geopolitical risk premium is unlikely to disappear anytime soon.

MARKETS THIS MORNING-

Asia-Pacific markets are mixed in early trading this morning, following yesterday’s rally triggered by the announcement of a framework agreement between the US and Iran. Investors are now sitting tight awaiting a rate decision from the Bank of Japan, which is expected to raise rates to a multi-decade high when it meets later today. Japan’s Nikkei is flat, while South Korea’s Kospi is up 1.4%.

THE CLOSING BELL: TADAWUL-

The TASI fell 0.1% yesterday on turnover of SAR 6.5 bn. The index is up 5.8% YTD.

In the green: Naseej (+8.7%), Flynas (+7.4%), and Saudi Cement (+7.0%).

In the red: Luberef (-4.7%), Ades (-3.9%), and Bupa Arabia (-3.7%).

THE CLOSING BELL: NOMU-

The NomuC fell 0.3% yesterday on turnover of SAR 21.8 mn. The index is down 1.3% YTD.

In the green: Hilwa (+7.6%), Al Rashid Industrial (+6.6%), and Horizon Food (+6.2%).

In the red: Al Mohafaza for Education (-9.7%), Lime Industries (-8.1%), and Edarat (-7.1%).