The whiff of diplomacy between Washington and Tehran has wafted into the futures market, forcing a recalibration of risk premia that have inflated the barrel price for the better part of two years. The prospect of a US-Iran nuclear deal, however fragile, has sent Brent crude tumbling, or rather stabilising at a level that (for the moment) no longer includes a conflict premium. For the British energy sector and the beleaguered pound, this is a double-edged sword.
Lower input costs welcome, but the spectre of deflationary pressure on inflation expectations is a nagging concern for the Old Lady of Threadneedle Street. The market is now pricing in a scenario where the Strait of Hormuz remains open for business, and that rationality is being reflected in the forward curve. However, the sceptic in me notes that the Iranian theocracy has a long history of extracting maximum concessions while offering minimal compliance.
The City, ever the optimist, seems to have forgotten the JCPOA's initial promise and subsequent collapse. For now, the gilt market is enjoying the glow of reduced geopolitical risk, but the long shadow of fiscal irresponsibility in both London and Washington remains. The real test will be whether the Treasury can resist the temptation to spend this 'peace dividend' before it is even banked.
