The Nikkei Stock Average rose sharply following the temporary ceasefire agreement between the United States and Iran, but the ceasefire is short, lasting only 2 weeks, and uncertainty remains over developments in the Middle East.
News of a temporary ceasefire agreement between the United States and Iran provided a positive catalyst for markets, with WTI crude oil futures falling to the ¥90-per-barrel range. Japanese equities rose sharply on the news, while the yen strengthened and bond prices also advanced. Semiconductor-related stocks were particularly strong, and the market overall saw increased buying to cover previously sold positions.
The ceasefire is limited to 2 weeks, and lasting stability in the Middle East remains some way off. The resumption of shipping will require time for insurance arrangements and safety checks, and routes from Japan to the Middle East could also take longer to reopen. Uncertainty remains over regional conditions in the Muslim world, so developments will continue to require close attention.
The key issues for the outlook in the Middle East are whether shipping can resume smoothly and developments in Israel. If the risk of renewed fighting increases, ceasefire negotiations could be terminated. Attention is also warranted because new interests could affect the countries involved, including the collection of transit fees for passage through the Strait of Hormuz. Negotiations over nuclear development could also prove difficult, and it is unclear whether they will move into long-term discussions.
If the situation in the Middle East moves toward stabilization, some expect Japanese equities to recover gradually to the ¥59,000 range. At the same time, although concerns about a global recession and a decline in risks to crude oil supplies are being viewed as market factors, uncertainty remains over developments in the U.S. presidential election and the pass-through of raw material costs.