Iran – Closing in on a deal
Last week, the US and Iran reportedly agreed on a Memorandum of Understanding that would extend the ceasefire by 60 days, ensure unrestricted passage through the Strait of Hormuz, and require the demining of the Strait within 30 days. However, the agreement still needs to be approved by both President Trump and Supreme Leader Mujtaba Khamenei.
According to reports, the US would also commit to negotiating broader sanctions relief and the release of frozen Iranian funds, while talks on Iran’s nuclear programme would continue during the ceasefire period. Tensions have not fully disappeared: over the course of the week, there were isolated episodes involving drones and missiles, but these were not enough to derail the ceasefire.
For markets, the direction of travel remains constructive, but the deal is not yet sealed. Any delay in political approval, renewed escalation around Hormuz, or disappointment regarding sanctions relief could still reverse the recent positive moves in risk assets.
ECB – Sealing a hike
The European Central Bank’s communication last week reinforced the message that a rate hike is coming; the key question is now one of timing rather than direction. The minutes of the April meeting showed a hawkish tone dominating the discussion, with policymakers still concerned about the risk of second-round effects. A strong consensus appears to be building around a June hike, which has now become the market’s base case, with around a 90% probability priced in. Credibility remains a central focus for the ECB, even though second-round effects have yet to materialise clearly. Preliminary inflation prints have not surprised to the upside, and food inflation in particular is not yet showing signs of a renewed spike. Beyond June, the outlook is more uncertain. Markets are pricing only slightly more than one additional hike by year-end, with September seen as the most likely timing. This suggests that while the ECB is close to delivering another hike, the bar for a more extended tightening cycle remains higher.
Algebris Investments’ Global Credit Team
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