Give Peace A Chance

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 and Samsung 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 that the indefinite ceasefire was still in effect despite 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 mariners who 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 sanctions on 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 Iranian Foreign 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 whereby China takes more assertive action to rein in its Iranian allies, aided perhaps by Vladimir Putin’s willingness to provide enrichment services for civilian purposes on 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 and viewed 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?

This hostage dynamic is not lost on RBA Governor Michele Bullock who yesterday told journalists in Sydney that “Australian’s are poorer because of this shock to oil prices... We are poorer, and there’s no way out of that.” Bullock delivered this grim prognosis after the RBA lifted the Australian policy rate by 25bp to 4.35%. This was the third-consecutive rate hike from the RBA and brings the cash rate equal to the previous cycle high that was reached in the aftermath of the COVID-19 and Ukraine War supply shocks.

Bullock characterized the new posture of monetary policy in Australia as “a bit restrictive” and indicated that the Board feels that it has given itself a bit of breathing space to pause and assess the unfolding impacts of the Iran war, and what the implications will be for growth and inflation. However, she also noted that the RBA’s updated economic projections are predicated on the war ending “soon”, and the Strait of Hormuz reopening. If that doesn’t happen, markets will start to ponder whether recession risks or rising inflation expectations will dominate RBA rate-setting decisions in the months ahead.

Australia was carrying substantial inflation momentum into the Iran shock as three rate cuts in 2025 and continued strong government spending conspired to pump up demand growth in late 2025 and saw the economy quickly hit the rev limiter. With one more 25bp rate hike priced into the futures curve Australia now faces the prospect of a cash rate cycle peaking higher than the previous cycle for only the second time in more than 30 years.

This reflects what is happening in the 10-year bond yield where the 40-year bull market than ran from the early 1980s through to 2022 looks to be well and truly over and the new cycle might be higher highs and higher lows, like it was during the 1970s when oil shocks, trade protectionism and great power competition characterized the international environment. Sound familiar?

For her part, Bullock will be hoping that Trump and the Iranians do ‘give peace a chance’ so she can avoid those adverse scenarios and stick to the comparatively benign but still far from ideal baseline outlook that the RBA has adopted.