Markets often behave as though they have already read next week’s headlines. In some cases, they do, when prices mysteriously rise or fall before actual events. So, is the current rally telegraphing a durable peace plan in the Middle East, boosted by US president Donald Trump’s incoherent and contradictory posts on social media? Across the world, equities have surged. The NASDAQ in the US has recorded 13 consecutive days of rally to hit all-time highs. The NIFTY has surged 9% from the close of 30th March. Mid- and small-cap stocks, the usual high-beta expressions of optimism, have raced ahead even faster. Crude oil prices, as quoted on NYMEX, US, briefly spiked above US$117 a barrel on 7th April, crashed 14% the same day and 12.8% on 17th April to as low as US$82.
At the heart of this optimism lies a single assumption: that the reopening of the Strait of Hormuz marks the effective end of the crisis. For import-dependent economies such as India, this is a big shift. Lower crude prices ease inflation, improve current accounts and brighten corporate margins. It is no surprise that markets have responded with enthusiasm. But the reality on the ground suggests something else. The notion that Hormuz is 'open' belongs more to social media posts than to shipping lanes.
Reports of vessels turning back mid-journey, of warnings issued by Iranian forces and of insurance costs that remain prohibitively high suggest that this artery of global oil trade is functioning poorly. If a chokepoint requires permission to pass, it is not open. Not surprisingly, having announced just two days ago that the easing of Russian oil sanctions would not be renewed, the US reversed course and renewed it on 17th April.
On the diplomatic front, the gap between Iranian and American positions remains wider than the Persian Gulf. The much-discussed negotiations—informally dubbed the 'Islamabad track'—remain in the initial stages. There has been no forward movement on the central questions which include Iran’s uranium enrichment, nuclear weapons, sanctions relief, unfreezing blocked funds, the role of regional proxies, Israel’s attacks on southern Lebanon, war reparations and, not the least, control and pricing of Hormuz transit.
America continues to claim that its navy has imposed a blockade on Hormuz. Iran claims that as long as the naval blockade remains, Hormuz remains under its control. On Friday, after president Trump announced that Hormuz is open, Iran claimed that passage through the strait requires coordination with the Islamic Revolutionary Guard Corps. Meanwhile, a few hours after Mr Trump announced that Israel has been 'PROHIBITED' from bombing Lebanon, Israeli operations continued, targeting infrastructure linked to Hezbollah. This looks more like a pause than peace.
If markets are indeed forward-looking once again, it appears that all these issues will dissolve soon. Talks are set to resume soon. But being forward-looking is not always prudent. In being prescient, markets can also be prone to wishful thinking. Investors have seized upon the most market-friendly interpretation of events: the ceasefire will hold, talks will progress and oil prices will remain contained.
But the US benchmark has been divorced from reality. Actual transactions have little to do with the speculative oil futures contracts traded in New York. As Saudi Arabia’s finance minister Mohammed Al-Jadaan said: “You see $90 on the screen… good luck buying a barrel at that price. Real price? $120–$160/barrel.”
Consider the physical reality of oil. Inventories in parts of Asia and Europe have been drawn down during the disruption, leaving little buffer against renewed shocks. Supply chains cannot snap back instantly. Even if Hormuz were fully operational tomorrow, it would take 40–50 days for flows to normalise and for stockpiles to be rebuilt. During this period, actual transacted prices will remain high, reflecting the reality of supply shortfall. Foreign investors appear to have grasped this fragility more readily than their domestic counterparts.
In India, foreign institutional investors have been persistent sellers through April, offloading tens of thousands of crores even as indices climb. Of course, they have also been selling because of a fall in the rupee, which erodes their returns in dollar terms.
The divergence between markets and reality is not unprecedented. Financial markets often move ahead of events, discounting outcomes before they materialise. At times, this prescience is justified. At others, it is merely premature. What would it take for markets to be proven right? I am working with the assumption that Iran has the upper hand now and hence I would keep an eye on whether Iran’s core demands are being met which centre on uranium enrichment, tolls on Hormuz, sanctions and Lebanon.
It is hard to see, having imposed a chokehold with Russia and China’s help, why Iran would give away its leverage. The other possibility is the US not agreeing to any of these and launching a fresh round of war, in which case all bets will be off once again.
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The US-Israel war on Iran has entered the fourth week and the Indian benchmark indices are down by 8%. The first-order effects of the war are familiar to all of us, with the Strait of Hormuz effectively closed. Of India’s imports,...
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