By Benjamin Picton, senior market strategist at Rabobank
It was TACO Tuesday again in the United States this week as President Trump announced that he was pausing Operation Freedom “for a short period” after it had been underway for just one day. Channelling John Lennon, Trump indicated that progress in negotiations with Iran had convinced him to ‘give peace a chance’, but that the US blockade of Iranian ports would remain in place for now.
The Dow Jones, S&P500 and NASDAQ all closed higher and US stock futures are pointing to further gains. Asian stocks are mostly higher with the KOSPI breaching 7000 for the first time andSamsung joining the USD 1 trillion market cap club.Bond yields are mostly lower but UK Gilts are a conspicuous outlier in that respect, with the 10-year up 9.7bps to 5.06% and the 2-year rising even further. The Dollar is down, the VIX is down, spot gold is a little over 1% higher and Brent crude (July contract) has fallen to $108.46/bbl at time of writing.
Trump characterized the pause as coming in response to requests from Pakistan and others and told media thatthe indefinite ceasefire was still in effectdespite Iranian strikes on the UAE port of Fujairah, commercial shipping, and US destroyers engaged in guiding commercial ships through the Strait over the last 24 hours.
Secretary of War Pete Hegseth said that the operation which began on Monday was purely defensive, stating that “we’re not looking for a fight”.Trump had earlier characterized the effort as a “humanitarian gesture” to free trapped merchant marinerswho were running short of provisions, but there is undoubtedly an added element of seeking to ease the squeeze on commercial shipping supply chains by bringing the 1,600 vessels trapped in the Persian Gulf back into the active shipping fleet.
As Operation Freedom was put on hold, Secretary of State Marco Rubio told a White House news briefing that Operation Epic Fury had already concluded,thereby sidestepping a legal requirement for Trump to seek congressional approval to extend military action beyond 60 days.Given that fire was still being exchanged with Iran as recently as yesterday,many will see this as little more than a legalistic wheeze – which it may be – but the administration is clearly content to keep up the pressure on Iran through Scott Bessent’s ‘Economic Fury’ initiatives of direct sanctions, naval blockade, disruption of the Iranian shadow fleet, and secondary sanctionson countries providing support to the Iranian military. The US has also imposed sanctions on five Chinese ‘teapot’ refineries believed to be engaged in trade of Iranian crude.
Trump’s announcement on Operation Freedom coincides with IranianForeign Minister Araghchi today travelling to Beijing to meet with counterpart Wang Yi.This comes ahead of Trump’s planned trip to China next week to meet with President Xi, where discussions over the Iran war and reopening the Strait of Hormuz are sure to be at the top of the agenda.
Might we expect some kind of grand bargain wherebyChina takes more assertive action to rein in its Iranian allies, aided perhaps by Vladimir Putin’s willingness to provide enrichment services for civilian purposeson Iran’s behalf and to take custody of Iran’s existing stocks of near-weapons-grade uranium? Might this also involve a Ukraine war component foreshadowed by recent unilateral ceasefire announcements from both Moscow and Kiev, at the prompting of the US?
Araghchi – along with President Pezeshkian and House Speaker Ghalibaf – is a member of the civilian government andviewed as a moderate in comparison to the hardliners of the IRGC.IRGC leader Vahidi has previously been critical of Araghchi for being too willing to do a deal with the US to end the war and re-open the Strait. As the US blockade remains in place and Iranian oil is prevented from flowing to market, storage capacity is filling up and raising the prospect that Iranian wells will need to be capped, with risks of permanent damage to oil production.
Effectively, Iran and the US are playing chicken with global energy supply chains. Iran is enduring damage directly from Economic Fury but is holding a metaphorical gun to the heads of US allies in Europe and Asia, who are facing looming shortages of key commodities and the consequent negative effects on growth, employment and inflation. The question remains: who will blink first?
Source: ZeroHedge News
