The Potential Way Forward for the U.S.-Iran Standoff

**Ariana Salvatore** (0:01)
Welcome to Thoughts on the Market. I'm Ariana Salvatore, head of US. Public Policy Research at Morgan Stanley. Today, the latest on U.S.-Iran tensions, talks, and the path to a deal. It's Wednesday, August 12th, at 2 p.m. in New York.
The diplomatic picture in the Middle East has shifted yet again. Last week, there was growing optimism that the US., Iran, and Oman could reach an arrangement to improve commercial passage through the Strait of Hormuz. But the two sides have since hardened their positions. This week, we've seen some bouts of escalation, and headlines have been mixed over the past few days.
At the same time, the energy security picture remains complicated. The US administration says the 7-day average of oil leaving Hormuz has risen to almost 9 million barrels per day. But traffic remains well below normal conditions, and the risks we think are no longer limited to the Strait. We're beginning to see potential for disruption across multiple regional chokepoints and alternate shipping routes. That brings us back to the framework negotiated nearly two months ago. The US and Iran signed a Memorandum of Understanding in mid-June. It was intended to create a 60-day window for negotiating a more durable agreement. That framework addressed commercial passage through Hormuz, the US naval blockade, sanctions relief and frozen funds, as well as longer-term negotiations over Iran's nuclear program. But the implementation has proven much harder than agreeing on the framework itself. So, where are negotiations getting stuck? First, there's the strait itself. Iran has tied a full reopening of the strait to a broader package that includes an end to the US blockade, sanctions relief and compensation. Washington, in turn, is trying to preserve economic leverage and appears unwilling to provide those concessions upfront.
Second, sanctions sequencing. The US wants relief tied to clear signs of progress, while Iran is seeking confidence that any relief is durable and not easily reversed. And third, there's the nuclear question. Enrichment levels, Iran's existing stockpile, and a longer term verification framework. These are still to be negotiated. That's likely to take longer than the 60-day time period.
So, what's the right framing here for investors? We think it's not necessarily a deal or no-deal binary. It's more so a series of partial agreements, implementation tests, setbacks, and renewed negotiations. After the June deal was signed, we flagged several live paths to re-escalation. Execution risk around sanctions and straight control, a potential divergence between the US and Israeli objectives, domestic political pressure in Washington, and the basic challenge of resolving core nuclear questions in such a short time frame. We think those risks are now becoming even more visible, but at the same time, both sides have strong incentives to avoid a return to full conflict, like the type of engagement we saw back in March of this year.
Moving forward, the signposts we laid out in June, maritime normalization, access for the International Atomic Energy Agency, sanctions implementation, military restraint, and rhetoric all remain the right trackers to watch. But expect the bargaining process itself to be noisy, unstable, and nonlinear. Rather than a clean transition from conflict to ceasefire to final deal, the more likely path will have fits and starts.
So what should investors do with that information? On oil, our commodity strategists remain constructive on prices, given the ongoing supply uncertainty and the emergence of new choke points across the region. Altogether, they see those constraints keeping the market relatively tight compared to the levels we briefly saw in June when the MOU was signed. If there's another sharp rise in oil prices, our US equity strategists think that could be a key risk to the near-term outlook. Our US economists agree, but also think the Fed would need a bigger shock than markets previously expected to resume hiking. As a result, we expect the Fed to stay on hold this year.
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

**SPEAKER_2** (4:10)
The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.