US-Iran War: Blueprint for Second-Round Negotiations

Scenarios:

1. Second round negotiations settle on a deal (including the reopening of Hormuz)
2. Second round negotiations do not settle on a deal, but still open to further negotiations until the end of the ceasefire Tuesday April 21 + might extend it.
3. Second round negotiations do not settle on a deal and fail, pessimism about further negotiations until the end of the ceasefire Tuesday April 21.
4. Second round negotiations do not happen, ceasefire is compromised or negotiations happen and fail compromising the ceasefire.

-------

1. Second round negotiations settle on a deal (including reopening of Hormuz). Oil should drop as Tankers will be allowed to transit through the Strait of Hormuz and deliver oil both to Western and Eastern market. Two factors indicate that oil would still somewhat remain above pre-war levels. Firstly, countries that have used their strategic oil reserves would want to refill them, increasing the “usual” global demand. Secondly, some energy sites in the middle east (such as Ras Tanura in Saudi Arabia) have been hit and need time to repair the damage done and that would take some time, reducing global supply. Some would argue that OPEC increased oil production from the other member countries that are not in the Gulf. Nevertheless, this increase is only about 206 000 barrels per day and it does not even represent 2% of the supply disrupted by the Strait of Hormuz closure alone. Now let’s talk about what would likely happen to the stock market, but before that, we have to first understand how major regulated institutions have reallocated their funds since the beginning of the war. Pre-war: Money in equities, gold, pricing in “soft landing + rate cuts”. During-war: Money rotated to Cash and short-term T-bills, pricing in “inflation + no cuts + possible hike if necessary”. Post-deal: Reverse rotation back into equities and gold, pricing-in “cuts back on the table now that the central-banks are confident enough that inflation due to the war will fade out”. The market, being forward-looking and assessing (since Monday April 13) that a deal is the more likely outcome, has already started pricing-in this idea; this is why even though we opened lower on Sunday April 12, SPX is (as of Tuesday April 14 ~22:00) higher than where it was before the war and only about 0.6% lower than ATH. The news that a deal was reached could likely be the catalysis of a new ATH.
2. Second round negotiations do not settle on a deal, but still open to further negotiations until the end of the ceasefire on Tuesday April 21 + might extend it. This scenario is basically the status quo; the market is optimistic about a future deal and portfolio managers rebalancing their portfolio accordingly. SPX could retest ATH until a third round negotiation (likely to be the last). As long as the narrative of a “soon-to-be deal” remains intact, I believe SPX will likely range between ATH (might go a bit higher/ make a new ATH) and roughly $6 868 which was where it was trading at before the start of the current war. My stance in this scenario is not bearish, neither super bullish; even though there is a high probability that a deal will be reached, the facts are that, without a deal, SPX is above the level it was trading at before the beginning of the war, probably at or even above current ATH and on the technical side stretched as SPX surged roughly 11% since the war low. Some investors would prefer to trade other assets such as gold which still trades around 8% lower than what it was trading at before the war with the idea that it has more room to the upside than SPX. Although I am willing to hear that argument, I believe that there is a reason why gold has not caught up with SPX rally; 2024 and 2025 were fabulous trading years for gold and the easy trade “buy gold and open the trading account 1 week later and being +10% up” is over for now. I am not saying that I am bearish on gold. In fact, in a scenario where USA and Iran come up with a deal before the end of the 2 weeks ceasefire allowing the Fed to think about cutting rates again, I am still overall bullish on the asset for the year, but I am simply advocating a more careful approach the next time an opportunity to buy presents itself.
3. Second round negotiations do not settle on a deal and fail, pessimism about further negotiations until the end of the ceasefire Tuesday April 21. In this scenario, the optimism that has been driving SPX higher since Monday April 13 starts to unwind and SPX would likely come back down around the ceasefire gap that opened on Wednesday April 8. This is the most difficult scenario to assess because the outcome is the most uncertain (unlike scenario 4 where we know the war resumes and the playbook is relatively clear), here we are in a grey area where the market does not know whether to price in a last-minute deal or a return to war. This ambiguity makes this scenario the most likely to produce violent market movements driven almost entirely by official comments (and obviously Trump Truth Social posts), where a single statement can create multiple % moves in minutes and no technical level or macro framework can be reliable (more politics than economics at this point). For that reason, this is a scenario where I would choose not to trade.
4. Second round negotiations do not happen, ceasefire is compromised or negotiations happen and fail compromising the ceasefire. This is the worst case scenario, both for the global economy and for markets. With war resuming, both parties would resume bombing and probably start hitting civilian and energy infrastructure across the region, which would be catastrophic for USA allies in the Gulf (Saudi Arabia, UAE and Qatar being the most exposed). Not only would the Strait of Hormuz remain closed, but the additional damage to energy infrastructure (already weakened by weeks of strikes) would further reduce global oil supply. Countries currently drawing on their strategic petroleum reserves would eventually see those reserves run dry, and the most vulnerable economies are Asian ones (Japan, South Korea, Taiwan, India) that do not produce their own oil and are almost entirely dependent on Middle East imports, unlike USA and Canada which produce a lot of oil locally. Oil goes up, inflation goes up, the Fed has no room to cut and may even be forced to hike to reduce inflation, creating an extremely difficult balancing act between fighting inflation and avoiding a recession as the pressure on growth and employment mounts. Equities go lower (back around the current low of the war). It is worth noting however that the scale of all these impacts would deeply depend on the duration and intensity of the resumed conflict; a war that resumes after the ceasefire and lasts two weeks is an entirely different situation than one that drags on through USA midterms and beyond, and markets would continuously reprice that distinction as the situation evolves.