Failure of US-Iran Negotiations May Cast a Shadow Over Risk Assets

SadaNews - The failure of the United States and Iran to reach a peace agreement over the weekend is expected to pressure market sentiment and bolster demand for safe assets on Monday, according to analysts.

Both sides failed to secure an agreement during talks held in Pakistan, which may result in disappointment among investors after they increased their exposure to higher-risk assets last week following the announcement of a ceasefire by the two countries. U.S. Vice President J.D. Vance announced that the negotiators would return to the United States without an agreement, as Iran did not commit to refrain from pursuing nuclear weapons.

Analysts expect the dollar to rise on Monday, following a 1.4% decline last week, alongside oil prices, while equities are likely to experience broad declines. Meanwhile, immediate expectations for treasury bonds appear more mixed, amid the tug-of-war between safe-haven flows and inflation fears. Additionally, crude oil markets will be affected by ongoing constraints on flows through the Strait of Hormuz, while gold may see increased demand.

While analysts believe that the market reaction may remain limited if investors adopt the view that these talks only represent a temporary setback to peace hopes.

Here are the main views of analysts:

Kyle Roda, Analyst at "Capital.com":

For U.S. Treasury bonds, the baseline scenario involves a quick buying spree at the opening, followed by price movements in both directions as markets balance demand for safe havens with inflation readings. The continuation of this demand entirely depends on the opening level of oil prices. If oil prices rise driven by concerns about the Strait of Hormuz, inflation expectations will be quickly repriced, establishing a floor for bond yields. This, in turn, limits the extent to which the long-term yield uptrend can persist.

The main question for Monday is whether the markets will interpret the situation as a temporary setback in negotiations or a structural collapse of the ceasefire framework. This distinction will determine whether the risk-off wave fades quickly or extends for a longer period. Naturally, the situation is characterized by a significant degree of fluidity and change, so attention will need to be paid to whether any new developments arise in the talks when they resume, or if public statements from the U.S. or Iran return to a hawkish tone.

Saroh Chanana, Chief Investment Strategist at "Saxo Markets":

The failure of the talks to reach an agreement represents a clear setback, noting that this development may end the trading wave driven by a sense of relief in the markets.

Oil prices are poised for additional gains, as risk appetite faces new pressures, with the Strait of Hormuz remaining a potential choke point even if it is not completely closed.

Nevertheless, the outcome of the negotiations is not surprising, given the widening gap of disagreement between the two parties over nuclear guarantees and the status of the Strait of Hormuz. For the dollar, this is expected to lead to a partial return to demand for safe havens, but without widespread increases unless new military escalation occurs.

Gold is also likely to benefit from renewed hedging related to geopolitical risks; however, this will not reach the point of markets returning to a sharply inflationary shock scenario.

Fiona Lim, Chief Strategist at "Malayan Banking Berhad":

There might be some disappointment, but what happened (the failure of negotiations) is not entirely out of the realm of expectations. The U.S. dollar may see further gains when markets open tomorrow.

Some Asian currencies, particularly those of net energy-importing economies - the South Korean won, Philippine peso, Japanese yen, Thai baht - began to decline as the weekend approached on Friday, and may remain under pressure throughout this week.

Kenneth Goh, Head of Private Wealth Management at "UOB Kay Hian":

The failure to reach an agreement will keep the geopolitical risk premium in the markets. Such failures have historically pushed investors toward safe assets at the opening, boosting demand for both the dollar and U.S. Treasury bonds.

The more significant dynamic becomes apparent at a later stage, as the ongoing constraints in the Strait of Hormuz push markets from mere risk aversion to a more complicated scenario involving stagflation risks.

Dileen Wu, Strategist at "Pepperstone Group":

The failure to reach an agreement leaves a solid uncertainty. In the very short term, the increase of the dollar, along with a slight decline in yields, appears to be a largely reasonable pricing. The interaction in U.S. Treasury bonds is likely to become more complex after the initial impact of the headline news wanes. Short-term yields may continue to decline driven by demand for safe havens, but any sustainable rise in oil prices will quickly re-establish inflation expectations at higher levels, imposing renewed upward pressure on the long end of the yield curve.

We are also likely to see an outperformance of the energy and defense sectors compared to the broader market on Monday, with a clear upward gap at the opening. The energy sector is the most direct beneficiary of a tightening supply side, while the defense sector reflects an escalating and more sustainable geopolitical risk premium. However, the scale of the move will depend on two key factors: how sustainable the strength in oil prices is and whether the market affirms that what is happening represents a prolonged supply shock rather than just a short-term emotional reaction.

Nick Twydale, Senior Market Analyst at "AT Global Markets Australia":

Oil prices are expected to start trading on Monday higher, alongside a rising dollar, as investors move towards risk aversion. In contrast, stock markets are likely to face acute pressure, while bond yields record a significant increase.

In recent days, a significant point of disappointment emerged in the continued weakness of shipping traffic through the Strait of Hormuz, which remains at less than 10% of its usual levels. Most investors were counting on a larger recovery in shipment volumes crossing the strait following the ceasefire announcement; however, this recovery has not materialized yet.

Dionysius Kontos, Co-founder of "Meyka AI", a market analysis firm driven by AI:

The fine details here are worth monitoring. The Iranian Foreign Ministry has kept the door open for more discussions, which means that the landscape does not indicate a complete collapse, but rather a prolonged state of uncertainty. This point is particularly significant when assessing whether the market's reaction on Monday will be sharp or more moderate.

Sector-wise, the energy sector is likely to be the standout on Monday. The Strait of Hormuz remains effectively closed, and in the absence of any agreement, uncertainty surrounding oil supplies remains high. Defense stocks may attract some interest, but a large part of this development seems to have already been factored into prices. Conversely, shipping and aviation stocks remain under pressure, while growth and consumer discretionary stocks may face headwinds as the inclination to avoid risks grows.