Global equity markets rallied and oil prices plunged 14% to $94 a barrel after the US and Iran agreed to a two-week ceasefire, although analysts cautioned the pause does not resolve underlying geopolitical and economic risks.
The truce, mediated by Pakistan, requires Iran to reopen the Strait of Hormuz for commercial shipping while both sides suspend attacks. Negotiations will begin in Islamabad on Friday based on the 10-point Iranian proposal.
The FTSE 100 opened 1.5% higher as investors rotated out of defensive sectors, including oil producers, utilities and tobacco stocks, and into economically sensitive names such as housebuilders, airlines and banks. UK gas prices fell 17%, though they remain around a third higher than pre-conflict levels.
Brent crude initially dropped to $91 before creeping back above $93 as markets recognised that reopening the strait will not immediately relieve supply constraints. Significant damage to oil and gas infrastructure across the Gulf means repairs could take years.
Dan Coatsworth, head of markets at AJ Bell, said: "Make no mistake – this is a pause in the proceedings and not a full resolution. That means any market rebound could quickly lose momentum unless there is clear progress with US and Iran talks."
He warned that even with lower oil prices, inflation remains a problem. "Today's retreat in the oil price is not deep enough to suggest that an inflation shock will be short-lived. Life is likely to get more expensive in the coming months, with or without a ceasefire."
Lindsay James, investment strategist at Quilter, noted that domestic-facing UK mid-cap stocks, which have fallen around 8% since the conflict began, rebounded more than 4% on the news. However, she cautioned that "the oil price we had become accustomed to pre-war is unlikely to return in the current environment."
Shell cut its first-quarter gas production outlook after attacks on its facilities at Qatar's Ras Laffan plant, forecasting 880,000 to 920,000 barrels of oil equivalent per day against previous estimates of 920,000 to 980,000. Qatari officials said some damage could require multi-year reconstruction.
Susannah Streeter, chief investment strategist at Wealth Club, said jet fuel shortages will take months to solve even if the agreement holds. "Airlines are likely to continue to pass on the cost to passengers for the foreseeable future," she said.
Longer-term access to the Strait of Hormuz remains uncertain, with Iran already charging ships $1m or more for passage through what has been dubbed the "Tehran Toll Booth". Speculation that the US could demand similar fees would add to shipping costs for oil, gas, fertiliser and helium.
Josh Gilbert, market analyst at eToro, warned investors not to mistake the pause for resolution. "A two-week window is not a permanent resolution. The rally in risk assets makes sense on the headline but it will need to be backed up by tangible progress in negotiations to hold."
Government bonds rallied as inflation worries faded and markets abandoned bets on further central bank rate hikes.