Citadel: Global stocks and bonds are expected to rise together if the US-Iran conflict avoids escalation

On Monday, Citadel Securities stated that as the US and Iran move closer to a solution path that avoids escalation, global stock and bond markets are still expected to rise together, even though the standoff around the Strait of Hormuz has not been fully resolved.

Nohshad Shah, Head of Fixed Income Sales for Europe, Middle East, and Africa at Citadel Securities, pointed out that although a formal agreement remains difficult to reach, both the US and Iran are incentivized to eventually reach some sort of arrangement, as the cost of further escalation would be too high.

Shah believes that President Trump has signaled his desire to gradually de-escalate the conflict and refocus on domestic issues ahead of the midterm elections, while Iran may prioritize economic reconstruction and internal stability. The most likely outcome is a limited framework agreement: Iran would accept partial restrictions on uranium enrichment in exchange for moderate and reversible sanction relief.

He pointed out that such an arrangement is more like a “freeze agreement” rather than a comprehensive solution, intended to buy time, lower short-term escalation risks, and stabilize the oil market, rather than truly resolve the core dispute. For the markets, this is already sufficient to support risk appetite, especially as investors are highly focused on the resumption of traffic through the Strait of Hormuz.

In this scenario, Citadel Securities believes that both risk assets and bond prices have room to benefit simultaneously. Easing geopolitical pressures would help alleviate risk-off sentiment and lower expectations of energy price shocks, thus supporting stock valuations and benefiting bond performance at the same time.

Shah further stated that for the European Central Bank and Bank of England, the easing of geopolitical pressures means that policymakers’ future rate hikes may fall short of current market pricing—that is, the actual policy path could be “lower than expected.”

However, Citadel Securities also cautions that the loosening of financial conditions in itself could reignite inflation, particularly in the US, where the artificial intelligence investment boom, fiscal stimulus, and tightening labor supply are already supporting price pressures. If liquidity loosens further, inflation risks could accumulate again.

The report also mentions risks brought by a potential change in Federal Reserve leadership. Trump’s nominee for Fed Chair, Waller, tends to focus on inflation indicators that exclude extreme price swings. Shah warns that this approach could result in policymakers reacting too slowly to changes in inflation dynamics, as price turning points typically emerge first in the so-called “tails of the distribution,” precisely the part trimmed by such mean-adjusted measures.

Shah noted that Waller’s preferred way of measuring inflation somewhat contradicts his previous criticism of the Fed’s slow response to inflation during the COVID-19 period.