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Within the space of a few hours, the US strategy towards Iran has undergone a dramatic U-turn. Under the threat of a US ultimatum, Tehran has agreed to reopen the Strait, whilst imposing conditions on this reopening. The Iranian authorities stated that it would be possible to pass through the strait in coordination with the armed forces and in compliance with ‘technical constraints’. On the US side, strikes have been suspended for two weeks to allow for peace talks to begin, whilst Israel has emphasised that the conflict in southern Lebanon is not part of the ceasefire agreement.

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•    The markets initially welcomed every sign of de-escalation: Government bond yields eased, equity markets rebounded and Brent crude fluctuated between $100-110.
•    Donald Trump’s address on Wednesday evening soured the mood. He said the war would be short, just another two to three weeks, but threatened to destroy Iran's energy infrastructure if Washington's demands were not accepted. 
•    In China, March PMI hit a high not seen since March 2025, providing confirmation that manufacturing was resilient, while in Japan, the Tankan manufacturing index trended higher in the first quarter.

•    The week was dominated by escalating tensions between the United States and Iran over the Strait of Hormuz, followed by a relative lull with the postponement of the US ultimatum.
•    Negotiations with Iran remain highly complicated, as Tehran’s demands are largely incompatible with those of the United States and Israel, despite indirect contacts via intermediaries.
•    Several central banks have adopted a more hawkish tone in response to inflationary fears linked to rising energy prices, particularly the ECB, which now expects more than three rate hikes by the end of 2026.

•    Three weeks after the US-Iran conflict began, there is no clear resolution in sight.
•    Meanwhile, US-China tensions persisted even though talks had resumed.
•    Central banks are caught between the energy shock and the risk that inflation expectations might de-anchor.

It has now been nearly three weeks since the conflict between the United States and Iran began—another geopolitical crisis in a world where the dividends of peace seem to have vanished for good. With every geopolitical incident, it is usual for superlatives to be thrown around to describe the gravity of the situation, but in this specific case, it is no exaggeration to say that this is the most significant crisis in the history of the oil market. The closure of the Strait of Hormuz had long been a tail-risk scenario in the minds of all investors—and perhaps in Donald Trump’s as well. But the U.S. president’s decision to overthrow the Iranian regime by eliminating its Supreme Leader on the very first day of the conflict has pushed Tehran to effectively block the world’s most important maritime chokepoint. Before the war, nearly 20% of the world’s oil supply passed through there. For nearly three weeks now, the world has lost nearly 12 Mb/d of oil flow, which is by far the largest supply disruption in history, far exceeding the 5 Mb/d lost during the two oil crises in the 70’s or the 4 Mb/d that disappeared during the two previous Gulf Wars in the 80’s and 90’s. 

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•    Mojtaba Khameinei’s appointment as Iran's supreme leader marked another notch higher in Middle East tensions.
•    Last Monday, Donald Trump claimed US operations in Iran had already made significant progress and that they could end soon.
•    China, meanwhile, is still in remarkable export health.

•    Tehran is maintaining a firm stance and seeking to rapidly increase the economic and geopolitical costs for its adversaries, targeting energy infrastructure and maritime routes as a priority.
•    If the crisis persists, a sustained rise in energy prices could simultaneously weigh on household purchasing power, business costs, and margins.
•    For now, the stock market reaction remains limited, but the rise in implied volatility (particularly for oil), the upturn in inflation expectations, and the persistence of a high geopolitical risk premium reflect growing concern.

As we feared in our note published on Friday, Donald Trump acknowledged the inability to reach an agreement on his own terms on the nuclear issue and decided to launch a large-scale military operation against Iran. The elimination in the early hours of the conflict of Supreme Leader Ali Khamenei, along with 48 other political and military leaders, confirmed that the objective of the United States and Israel was indeed regime change and not just the destruction of Tehran's nuclear and ballistic capabilities. While the world has seen many phases of tension between the two sides since 1979, this is an unprecedented escalation whose consequences will be profound and lasting for the entire region and undoubtedly for the global geopolitical balance, as it appears that this intervention is also a message sent to China, of which Iran was a partner, as Venezuela was before it.

•    Germany’s final fourth-quarter GDP reading showed a 0.3% rise QoQ, a sign that private consumption was strong, government spending on the rise and investment recovering.

•    Several Fed members moved to a more restrictive position by reiterating the need to have more solid proof of disinflation before cutting rates again.

•    US-Iran talks continued in Geneva but with no progress; Tehran rejected the US demands.

•    Geopolitical tensions remain high with the failure of Ukraine-Russia negotiations, the prolongation of US-Iran talks, the continued deployment of the US armada in the region, and the risk of a partial closure of the Strait of Hormuz. 

•    In the US, the FOMC minutes reveal differences of opinion among governors regarding inflation, which remains above target but is slowing, and resilient growth, which argues for patience before further rate cuts.

•    In the UK, unemployment rose to a 5-year high of 5.2% so markets are now expecting two rate cuts before June.