Markets showed only modest gains after last week's interim agreement between the U.S. and Iran, even as oil prices fell, according to Deutsche Bank analyst Henry Allen. In a note, Allen outlined four factors that, taken together, limited upside for risk assets.
1) Fed hawkishness raised real yields - offsetting geopolitical relief
Allen highlighted the Federal Reserve's recent shift toward a more hawkish stance as a primary factor. He noted that half of the officials included in the Fed's dot plot signaled at least one rate hike this year, and that new Fed Chair Kevin Warsh stressed the priority of restoring price stability. Against that backdrop, the U.S. 10-year real yield closed at 2.22% following the Fed decision, its highest level in over a year, which Allen said was effectively "counteracting the initial relief that came after the deal was agreed."
2) Markets had largely priced the conflict as temporary
The bank argued that much of the market response was muted because investors had already treated the conflict as transient. Oil futures had been showing a forward curve consistent with lower prices ahead, leaving limited room for a further rally once an agreement was reached. As Allen put it, "the upside was always more limited once a deal was reached."
3) Equity valuations were already elevated after a historic rally
Valuations in equities also constrained further gains. Allen pointed out that the S&P 500 had climbed roughly 16% over a two-month span - an occurrence he said has been seen only four other times since World War II. He added that three of those prior instances were post-recession bouncebacks, leaving just one prior example outside of a recession context - which he noted happened a few months before the Black Monday crash in 1987. Those comparisons underscored how stretched market multiples had become following the recent rally.
4) Physical oil market and shipping remained disrupted
Finally, Deutsche Bank drew attention to ongoing frictions in oil flows. Traffic through the Strait of Hormuz remained "at just a fraction of its pre-conflict levels," and Brent crude prices were still about 30% above where they stood at the start of the year despite the interim deal. That persistence of constrained physical flows and elevated crude prices capped the potential for a broader market bounce tied to easing geopolitical tensions.
Looking beyond these near-term constraints, Deutsche Bank said longer-term optimism still has merit. The bank emphasized that a scenario in which Fed hawkishness is driven by upside growth surprises is "a scenario markets can weather," and it argued that the current configuration of risks and policy differs meaningfully from the conditions that preceded the 1987 Black Monday episode.
Key takeaway - Multiple factors tied to monetary policy, pre-existing market positioning, stretched equity valuations and ongoing oil market disruptions combined to limit risk asset gains after the U.S.-Iran interim agreement.