Markets are reacting positively to the potential US-Iran deal, with S&P futures up 0.9%, Asian equities up 1.3%, and oil falling below $100/barrel. The dollar is weakening as safe-haven demand drops. Traders are now pricing in a Fed rate hike by December instead of a cut, with Kevin Warsh's appointment adding hawkish expectations.

The US-Iran deal is likely only a preliminary agreement extending the ceasefire and partially reopening Hormuz. Tough nuclear negotiations remain. Rhetoric shifted from bullish on Saturday to guarded on Sunday, especially from Iran. Gulf Arab states and Turkey's mediation has made more headway than when they were less involved.

Lower oil prices reduce inflation pressure and the need to hike rates, which is good for bonds and equities. However, strained fiscal policy from increased defense spending ($500B in US) is pushing yields higher. Stagflation is now the base scenario for bond markets. The yield curve could start to bow in, meaning the belly should do better. Kevin Warsh faces a paradox: wanting to cut rates but also shrink the balance sheet while the Fed is expanding through T-bill purchases.

The Iran war and Hormuz closure are reducing Gulf oil export volumes while increasing domestic spending on defense, repair, and new pipelines. This means the pool of Gulf money for external investments is shrinking. Gulf petrodollar flows to US debt markets have historically helped suppress US interest rates - if these dry up, a significant force keeping US borrowing costs low could fade. Saudi Arabia is earning more due to higher oil prices offsetting volume losses, but one month of fighting costs 1.5% of GDP in spending.

The Iran war is reducing Gulf oil export volumes and increasing domestic spending on defense and infrastructure, shrinking the pool of petrodollars available for external investments. This could affect US interest rates and global markets.