Optimistic Castle Securities: Iranian conflict risks recede, US stocks and bonds likely to rise together

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Citadel Securities executives now believe that as the Iran conflict moves toward de-escalation, even though the stalemate in the Strait of Hormuz persists, both U.S. stocks and bonds are likely to strengthen simultaneously.

Nohshad Shah, Citadel Securities EMEA Head of Fixed Income Sales, wrote in a client report: Although no formal agreement has been reached, both the U.S. and Iran ultimately have incentives to move toward negotiations, as the cost of further escalation is too high.

Shah pointed out that U.S. President Trump has signaled his intention to de-escalate the conflict and refocus on the domestic agenda in preparation for the midterm elections, while Iran is likely to prioritize economic reconstruction and internal stability. The most probable outcome is a limited framework agreement—Iran accepts partial restrictions on nuclear enrichment activities in exchange for moderate and reversible sanctions relief.

Shah wrote: "Ultimately, this will not be a comprehensive agreement, but rather something like a freeze arrangement—designed to buy time, reduce the immediate risk of escalation, and stabilize the oil market without resolving the fundamental disputes. For markets and investors who are mainly focused on the reopening of the Strait of Hormuz, this is already sufficient."

For central banks, Shah stated that the easing of geopolitical pressures means policymakers in Europe and the UK will likely raise rates less than the market expects.

He also highlighted a risk: Looser financial conditions may fuel inflation, especially in the U.S.—AI spending, fiscal stimulus, and tightening labor supply are all contributing to price pressures.

Citadel Securities also warned of the risk of potential leadership change at the Federal Reserve. Trump’s nominee for Fed Chair, Kevin Warsh, has consistently emphasized inflation metrics that exclude extreme price fluctuations. Shah warned that this approach could lead to slower responses from policymakers to changing inflation dynamics—because turning points often occur at the “tails” of the distribution, which are precisely the parts excluded by “trimmed mean” metrics.

Shah wrote: "Warsh is choosing an inflation gauge that works in his favor, which is directly contradictory to his previous criticism that the Fed was slow to respond to inflation during the pandemic."

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