Coin tossing

Today’s chart shows that markets still see the outcome of the US-Iran conflict as no better than a toss-up. Polymarket, an online prediction market, is pricing only around a 50% chance of a ceasefire by the end of April, which tells us that investors are not yet convinced that a clear off-ramp has been found.

That said, markets are holding up because they increasingly believe that both sides have strong reasons to avoid the next stage of escalation. A further step up in the conflict would be a lose-lose scenario: the US could target Iran’s energy infrastructure, while Iran could retaliate against production facilities across the Gulf. Such an outcome would risk a much more serious energy shock, tighter financial conditions and renewed pressure on global growth.

For now, equities seem to be supported by the idea that Washington wants a deal, or at least a pause. Oil and stock markets remain volatile, but broadly close to where they were a week ago, suggesting that investors still expect the worst to be avoided. Brent moving back above $100 per barrel remains a clear warning sign, however, as such levels would become uncomfortable for all major oil-importing economies if sustained.

Our base case remains that an off-ramp will eventually be found, because the cost of a prolonged conflict would be very high for all sides. But as long as no deal is secured, markets will remain highly sensitive to every headline. If negotiations fail, concerns around inflation, weaker growth and higher rates would quickly return to the forefront and weigh on equities.