What comes next
Markets that suffered the deepest drawdowns during the conflict are likely candidates for the sharpest near-term recovery. From a sector perspective, materials — sold off heavily on rising interest rate expectations — and technology, which is acutely sensitive to growth conditions, appear well positioned to outperform during the relief rally. Energy, by contrast, is expected to give back a portion of its earlier gains as the immediate supply shock premium unwinds.
That said, investors should resist the temptation to treat this as an all-clear signal. Several structural constraints will limit the extent of any recovery. The ceasefire is temporary and the details remain sparse. Iran’s 10-point proposal and Washington’s stated positions retain substantial differences, and the Islamabad talks carry no guarantee of success. Even the reopening of the Strait of Hormuz — subject to Iran’s ‘technical limitations’ — will take weeks, if not months, before shipping backlogs are cleared and supply chains normalise. Crude oil prices are therefore unlikely to revert to pre-war levels in the near term.
Infrastructure damage inflicted during the six-week conflict cannot be quickly reversed. Ras Laffan, the world’s largest liquefied natural gas (LNG) export complex, had 17% of Qatar’s export capacity knocked offline, with repairs expected to take three to five years according to QatarEnergy’s chief executive. The disruption to supply will weigh on energy prices well beyond any ceasefire window.
Beyond the physical supply constraints, six weeks of conflict will leave a discernible mark on growth, particularly across energy-import-dependent economies in Asia — though the hope is that this proves a temporary supply shock rather than a lasting drag on output.
For central banks, the ceasefire provides some breathing space but does not resolve the underlying dilemma between inflation and growth. Expectations of a Federal Reserve (Fed) rate hike this year are likely to moderate for now, offering some support to rate-sensitive assets. However, volatility will remain a constant companion so long as a comprehensive peace agreement remains out of reach. Investors positioned for a prolonged conflict may use the relief rally as an opportunity to trim exposure, and some profit-taking later this week would not be surprising.
The next fourteen days matter enormously in determining whether markets can sustain gains or are simply enjoying a temporary reprieve.
Technical outlook
The sharp recovery on Wednesday has validated the formation of a double-bottom pattern in the Japan 225 index. With the index breaking above the neckline at approximately 54,600, the correction appears complete and the index has resumed its uptrend. The neckline now serves as the new support level, with the next upside target at around 58,600.
Japan 225 daily chart
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