Truce in Iran: Relief but Not Resolution

We view the immediate market reaction to the truce announcement as mostly about rapid unwinds of speculative positioning and hedges related to the war and less about a fundamental reassessment of the conflict and its implications. While news of a truce is certainly welcome—and does reduce near-term risks that could push energy prices higher that lead to worsening economic impacts—many questions remain about the ultimate outcome of the war.

First, and most immediate, is whether the truce will hold up. A two‑week pause lowers the probability of immediate escalation, but such arrangements can prove fragile, particularly when key strategic issues remain unresolved.

Second, there is still uncertainty around the reopening of the Strait of Hormuz. It's unclear currently whether, to what degree, and under what conditions the strait reopens, even if deescalation continues:

• Iran may seek to extract economic or political concessions in exchange for allowing tanker passage, which could prevent activity from normalizing and/or keep prices elevated.
• Incremental or conditional reopening could result in intermittent disruptions, use of convoys to facilitate passage, or insurance constraints that also restrict transport even if the strait is technically "open."
• Shipping insurers, charterers, and operators are likely to remain cautious, meaning commercial normalization may lag political agreements. Indeed, traffic through the strait remains virtually zero and will remain a key signpost for this crisis (see chart below).

The Iran war quickly evolved from a regional conflict into a global energy supply shock, with the Strait of Hormuz effectively blocked for the first time since the 1970s. Global energy shocks historically have tended to result in more severe economic and financial market impacts versus other geopolitical conflicts. Year-to-date, the surge in oil prices is the largest in over 40 years, based on CME Group data.

Since the start of the Iran war, we have been tracking potential economic and market outcomes via a scenario analysis that includes different potential outcomes. The scenario table below provides an updated assessment of the likelihood of each case, and assumptions for the potential economic, policy, and market impacts. This analysis remains focused on the degree and duration of global energy supply disruptions. The longer energy and commodity supplies are constrained, the greater the economic damage.

• Upside: The likelihood of the upside case, defined by an imminent end to military operations and no lasting impacts to global growth, appears low due to the cumulative impact of lower energy production, energy infrastructure damage and time to recover to prior levels of production. This is the case even if the war was to end today.
• Moderate: The moderate case remains possible at this time, defined by a sustained wind down in military operations and a gradual normalization of energy flows. Oil prices may remain elevated through the second quarter due to the cumulative supply impact. Global growth and inflation are moderately impacted, with Asia and Europe most vulnerable.
• Adverse: In the adverse case, which we see as also possible today, military operations fade, but limited strikes may continue that impede the flow of traffic through the strait and to continue to impair and shutter the global energy infrastructure. This could keep energy prices elevated into the second half of 2026. The risk in the adverse case is economic stagnation in Europe and Asia due to larger dependencies on energy imports from the Middle East, as well as a weakening of U.S growth. Central banks, particularly in Europe, may be inclined to hike rates due to a spike in inflation.
• Severe: The severe case represents a possible scenario that could result in a global recession due to a prolonged conflict leading to acute energy and commodity shortages that drive overall inflation higher and leads to sharply tighter financial conditions. The combination of recession risk and higher inflation is a particularly difficult mix for policymakers to respond to. In this scenario, the potential for deeper and more persistent drawdowns across global equities increases.

Even if the war ends quickly, an energy shock has the potential for lingering impacts. How quickly production can return depends on the type of energy supply, amount of production curtailed and extent of infrastructure damage. The longer energy is unable to be exported, the greater the chance of complete energy production shutdowns. There is a non-linear impact of production halts for engineering reasons: for example, on the LNG side, there is a slow process of restarting production to avoid thermal shock to sub-zero cryogenic equipment.

The temporary truce is welcome news and does remove near-term risks associated with intensifying military operations and strikes on energy infrastructure, but many critical questions are still unanswered and the possibility for a wide range of potential outcomes remains. We reiterate our view that now is not the time to aggressively add risk. Without more clarity on the fundamental impacts of the U.S.-Israeli War in Iran, market volatility is apt to remain elevated with potential for short, but sharp swings driven by headline risk.

Heather O'Leary, Senior Manager, Equity Research and Strategy, contributed to this report.