Iran Declares Readiness for War and Sets Conditions for Hormuz Reopening

What happened

Iran's Foreign Minister Abbas Araghchi told Al Jazeera that the country is prepared for “all scenarios” of war with the United States and Israel, and does not rule out the possibility of renewed conflict. He stated that Iran has upgraded its weaponry, addressed vulnerabilities, and tested new arms, with its forces at the highest level of readiness. Concurrently, Tehran has set conditions for reopening the Strait of Hormuz and resuming negotiations with Washington.

Iran's conditions for reopening the strait include lifting sanctions imposed after the Islamabad memorandum, reducing US forces in the region, restoring oil waivers, and releasing frozen Iranian funds, including those held in Qatar. Araghchi mentioned that consultations with Qatari mediators have shortened the proposed implementation period for reopening the waterway from five days to two. He also described a letter from US Vice President JD Vance seeking dialogue as a “positive step” but warned against any attempts to create divisions. An Iranian delegation has traveled to Qatar to continue consultations, but Araghchi ruled out any immediate meeting with US officials.

Why it matters

The Strait of Hormuz is one of the world's most critical maritime routes for oil transportation, through which a significant portion of global supply passes. Iran's declaration of readiness for war, combined with the imposition of conditions for the strait's reopening, substantially raises geopolitical risk in the Middle East region. Any disruption or threat of disruption in the Strait of Hormuz has the potential to directly impact oil prices and, consequently, the global economy. The Iranian stance signals an escalation in tension and the possibility of confrontation, which creates uncertainty for global markets and energy supply stability.

Market impact

• Interest rates and bonds: In a scenario of increased risk aversion, investors tend to seek safer assets, such as US Treasuries. This can lead to a drop in yields on developed economy government bonds as demand for these papers increases. Emerging market bonds, on the other hand, may suffer from capital outflows.
• Dollar and exchange rates: The US dollar tends to strengthen in times of global uncertainty, acting as a safe haven. Emerging market currencies, such as the Brazilian real, may depreciate against the dollar due to capital flight and a perception of higher risk.
• Equities: Global equity markets tend to react negatively to geopolitical tensions, especially those that threaten energy supply. Sectors sensitive to energy costs or with direct exposure to the region may be the most affected. Risk aversion can lead to widespread selling.
• Commodities: Oil is the most directly impacted commodity. The threat of disruption in the Strait of Hormuz tends to significantly raise oil prices due to supply concerns. Other commodities may have mixed reactions, depending on their correlation with global economic growth, which can be affected by higher energy prices.
• Brazil: Brazil, as an oil importer and an emerging economy, may be affected by higher commodity prices, which would impact inflation and the Copom's monetary policy. The depreciation of the real against the dollar would also be a likely consequence, pressuring import costs and external debt. The Ibovespa would tend to follow the global risk aversion movement.

What to watch

Investors should closely monitor diplomatic developments between Iran and the US, as well as negotiations with Qatari and Pakistani mediators. Any sign of progress or setback in Iran's conditions for reopening the Strait of Hormuz and resuming dialogue will be crucial. Furthermore, military movements in the region and any additional statements from Iranian or US officials regarding the situation will be important for assessing the likelihood of escalation or de-escalation of the conflict.

Scenarios

Base Scenario: Iran and the US continue indirect negotiations via mediators, with the Strait of Hormuz reopening under some of Iran's conditions, avoiding direct conflict but maintaining elevated tension. Oil prices remain volatile. Risk Scenario: Negotiations fail, Iran keeps the Strait of Hormuz closed or restricted, and tensions escalate into military confrontation, resulting in a significant disruption to oil supply and a shock to global markets.

Original source: Middle East Eye. For information only, not investment advice.