European stock markets surged on Monday as investors embraced a risk-on mentality following confirmation of a peace deal between the United States and Iran.
Pakistan announced the agreement between the two nations, with Donald Trump declaring on Truth Social that the oil market would begin moving again.
Trump posted: “Ships of the world, start your engines. Let the oil flow,” referencing the Strait of Hormuz, which connects the Persian Gulf and the Gulf of Oman.
The strait carries around a fifth of the world’s oil supply, and its effective closure at the end of February triggered a severe choking of global energy supply over recent months.
Brent crude had temporarily breached $138 a barrel at the height of the conflict, delivering a major energy shock to economies worldwide and driving UK petrol prices to an average of 159.43p per litre.
US inflation surged to 4.2 per cent, a three-year high, as the spike in energy costs rippled through the American economy.
Chris Beauchamp, chief market analyst at IG, said: “Investors are certainly cheering the news, hopeful that things can return to something approximating pre-war normality fairly soon.”
However, Beauchamp noted the FTSE 100 was struggling to participate in the “general rejoicing,” with BP (LON: BP) and Shell (LON: SHEL) “seriously hampered” by a falling oil price sitting below $84 a barrel.
Shell ranks third on the FTSE 100 with a market cap of £180bn, while BP sits eighth at £83bn, meaning their movements heavily influence the broader London index.
The FTSE 100 opened up 0.8 per cent before easing to a 0.3 per cent gain, trailing Germany’s DAX at 1.4 per cent, France’s CAC 40 at 1.1 per cent, and the STOXX600 at 0.8 per cent.
The deal itself, set to be formally signed in Switzerland on Friday, has yet to be confirmed in full detail, leaving analysts cautious about the pace of any market recovery.
Tamas Varga, analyst at TP ICAP’s PVM Oil Associates, said: “Nothing is straightforward, and even Franz Kafka could not have written a more grotesque novel.”
Varga added: “Yet, it seems increasingly plausible that the conflict that upended the global economy and the oil balance is slowly drawing to an eagerly awaited end.”
He warned nonetheless that the “pre-crisis status quo may never be fully restored, or at least not for a long time,” tempering some of the market optimism seen at the open.
Neil Wilson, UK investor strategist at Saxo Markets, said: “The realisation will dawn on markets that unwinding the Gordian knot of US-Iran relations will take time — energy prices will decline slowly rather than suddenly.”
Iran’s chief negotiator Mohammad Bagher Ghalibaf cast further doubt on the deal’s durability on Sunday, stating that Israeli strikes on Lebanon showed the US was not fulfilling its commitments.
Ghalibaf said there was “no point” in talking about continuing “down this path,” adding a layer of geopolitical uncertainty that markets will need to price in carefully.
Thomas Matthews, head of markets at Capital Economics, warned that “oil markets will take some time to normalise even once the Strait reopens,” and that monetary policy would be “tighter” in some cases, with bond yields “therefore higher than otherwise would have been the case.”
Gilt yields did ease modestly on Monday, dropping around five basis points to 4.8 per cent, bringing some relief to Chancellor Rachel Reeves as speculation over fiscal policy intensifies.
Sir Keir Starmer welcomed the peace deal as a “hugely important step,” and confirmed he spoke with President Trump on Sunday evening, with the two leaders agreeing that “freedom of navigation must be restored” in the Strait of Hormuz.