Navigator: ME - A Great Deal of Defeat.
This report analyses the putative (not yet confirmed) framework agreement to pause the Middle East War ("the deal") while key issues (such as Iranian de-nuclearisation) are negotiated.
The widely leaked adumbrate of the deal would amount to a strategic victory for Iran and a defeat for the US. It would leave the Iranians in substantive control of the Straits of Hormuz. The nuclear issue is pushed out to future negotiations over the 60 day pause follwing the ceasefire .
But markets will care only about the fact that under the "deal" shipping will resume and the world would not run out of energy by the end of summer. However, the rally will be quite mooted as financial markets never reflected the extent of economic danger.
Furthermore there are short and long term implications of this deal that are negative. It is unlikely to reverse the decline in this US Administration’s fortunes as it cannot be sold to voters as a victory. It weakens US credibility & power projection geopolitically.
And there are implementation issues such as whether both sides mean the same thing by the deal's provisions. And whether the Israelis will accept any agreement which stipulates a halt to its war in Lebanon and thus ensures the preservation of Iran's proxies.
Key to these issues will be to gauge the extent of US military withdrawal. Without its presence there is little to coerce Iran into conforming with the conditions of the deal. The coercive power of the US military is already diminished because US backing of this deal indicates that military conflict is too costly politically and economically for President Trump. It is likely the Trump Administration will be loath to repeat the experience - come what may.
Expect an equity and bond rally from this deal but of limited proportions! The US$ might weaken a bit as safe haven demand will decline but transaction demand will rise. For details of How we have shifted strategy, please see our Wealth Preservation Portfolio in the report.
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