Morning Brief: Ceasefire Optimism Fades as Markets Turn Cautious

Initial market optimism following the Middle East ceasefire proved short-lived, as renewed tensions and violations quickly dampened sentiment. Oil prices rebounded, while global and Turkish assets showed volatile but partially resilient performance amid ongoing geopolitical uncertainty.

Ceasefire Holds in Name, Not in Practice

Despite the announcement of a ceasefire in the Middle East, developments on the ground suggest tensions remain elevated. Israeli strikes on Lebanon, which reportedly caused significant casualties, have reinforced concerns that the truce is not fully holding.

Iran, meanwhile, dismissed the prospect of meaningful peace talks with the US under current conditions. With both sides maintaining sharply opposing positions—particularly on Iran’s nuclear programme—a diplomatic resolution appears distant, even if the intensity of military operations has temporarily eased.

Markets Rally on Initial Optimism

Markets initially responded strongly to the ceasefire announcement. Global equities rallied sharply, while expectations that the Strait of Hormuz would reopen pushed Brent crude prices down to around $90 per barrel.

Given that oil had recently approached $120 per barrel, this represented a decline of nearly 25%.

At the same time, assets previously sold off during the conflict—such as US Treasuries and gold—regained demand, while the US dollar weakened. The euro rose above the 1.17 level against the dollar.

Sentiment Reverses as Tensions Re-Emerge

The positive momentum quickly faded. Israeli attacks and Iran’s claim that the ceasefire had been violated—followed by renewed restrictions in the Strait of Hormuz—triggered a reversal in market sentiment.

Brent crude climbed back toward $96 per barrel, while gold retreated from intraday highs of $4,850 per ounce to around $4,720.

From a technical perspective, analysts point to $4,665 as a key support level for gold, while silver has also pulled back, with $70.50 seen as a critical level for positioning.

Turkish Assets Stage a Relief Rally

The brief improvement in global risk appetite provided a strong boost to Turkish markets, which had been under sustained pressure in recent weeks.

Türkiye’s five-year CDS risk premium declined sharply from 320 basis points to 249, while the BIST 100 index surged nearly 5% on the day.

Banking stocks led the gains, rising close to 9% as expectations of further rate hikes eased. The Turkish lira strengthened, with USD/TRY falling to around 44.50, and bond yields declined notably, with the two-year benchmark yield dropping to approximately 39.5%.

BIST 100 hits 13,533: Middle East Ceasefire Sparks Major Rally

Central Bank Dynamics and Liquidity Management

Since the start of the conflict, the Central Bank of the Republic of Türkiye (CBRT) has seen a roughly $60bn decline in its net foreign exchange position, reflecting efforts to stabilise markets.

With signs of stabilisation emerging, market participants may begin reassessing expectations of further rate hikes. Improved sentiment could support renewed capital inflows, stronger demand for lira-denominated assets and a gradual rebuilding of reserves.

Market chatter also suggested that the CBRT may have purchased around $8bn in reserves recently, though no official confirmation has been provided.

Economic Outlook: Challenges Persist

Despite the improved tone, structural challenges remain. Türkiye’s real sector is expected to continue facing pressure, while the real appreciation of the lira is likely to persist.

The current account deficit is also expected to widen further, driven by higher energy prices and underlying structural imbalances.

Global Markets Turn Cautious Again

Asian markets opened weaker following the initial rally. While US equities closed strongly, futures trading pointed to mild declines.

South Korean and Japanese equities posted losses, while the US 10-year Treasury yield edged higher to around 4.30%. Bitcoin remained broadly stable near $71,000.

Focus Shifts to Inflation and Fed Policy

Markets are closely monitoring both geopolitical developments and the inflationary impact of elevated oil prices, which remain roughly 40% above pre-conflict levels.

With hundreds of vessels still waiting near the Strait of Hormuz and energy infrastructure damaged, supply disruptions may persist longer than expected. A sustained drop in oil prices below $80 per barrel appears unlikely in the near term.

Attention is now turning to upcoming US inflation data, including the Fed’s preferred PCE measure and CPI figures. According to Reuters surveys, core PCE is expected to rise 0.4% month-on-month and 3.0% year-on-year.

With rate-cut expectations fading—and even limited rate hike scenarios being discussed—the energy shock may have broader implications for global monetary policy.

Conclusion

While markets briefly welcomed the ceasefire, ongoing violations and structural uncertainties have quickly restored caution.

Investors are now navigating a complex landscape shaped by geopolitical risk, elevated energy prices and shifting central bank expectations—suggesting volatility is likely to remain a defining feature in the near term.

By Emre Değirmencioğlu (@emredegirmenci5)
Group Manager
Treasury Department, Kıbrıs İktisat Bankası

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