Below, Benjamin Jones, Global Head of Research and Strategy, and Ashley Oerth, Senior Investment Strategist at Invesco, share their analysis of the latest developments in the Gulf and the implications for the economy and financial markets.

You can find the full review and different scenario’s HERE.

In a strange turn of events, it is now the US that appears to be restricting traffic through the Strait of Hormuz. President Trump is threatening to blockade the Strait commencing Monday afternoon. US officials point to lack of progress on the fate of Iran’s nuclear program. Meanwhile, Israel has continued to strike Hezbollah-linked targets in Lebanon while Iran asserts that the ceasefire includes Lebanon.

Markets rebounded. The prospect of some form of peace dividend saw markets react very positively on Wednesday and Thursday. Those parts of the market hit hardest in March rallied most and the USD weakened. Global equities are now less than 2% lower than their close on 27th February. This is confirmation of our view that any easing in tensions, will likely mean a return to trends that were in place prior to the conflict – i.e. non-US markets outperforming and a weaker USD. Thus, our medium-term views remain intact.

Central banks hikes reduced. Hikes are still priced for the European Central Bank and the Bank of England but fewer than were expected at the end of March. Inflation prints will likely come in higher over the coming months, as we saw with US inflation prints last week. We continue to believe central banks will not start hiking unless inflation expectations move meaningfully higher. So far, they appear to have remained within what we view as central bank “comfort zones.”

What to watch now. That a ceasefire was entered into reduces the likelihood of our worst case scenario but does not, so far, mean that activity in the Middle East and Strait of Hormuz will suddenly return to pre-conflict normality. We accept that there has been a de-escalation in the armed conflict but the scale of the de-escalation and lack of clarity on when trade flows will resume leaves us broadly still in the same place – status quo – from an economic perspective.

Assuming any blockade is short-lived, we would expect to see an increase in west-to-east traffic in the Strait of Hormuz as ships currently in the Persian Gulf take the opportunity to exit. The more important data to watch will be the east-to-west data: Will shipping firms voluntarily enter the Gulf and risk getting stuck if the ceasefire does not hold or Iran decides to resume strikes? From an economic and financial market perspective, this is the most important factor to watch going forward, in our opinion.

So what? We expect renewed pressure on risk assets and upward moves in oil early this week. However, we gradual improvement in conditions (under our first two scenarios) is more likely than not before the end of April. The last week has shown that positioning in too defensive a manner has not helped portfolios and risk assets are primed to rebound on good news. We therefore remain of the view that the prudent response remains caution but staying invested rather than conviction.

Over the remainder of the year, we still prefer non-US markets to US markets and expect the dollar will weaken – but it is unlikely to be a smooth ride.