Global equity markets rallied sharply on Wednesday morning after Washington and Tehran agreed a two-week ceasefire, easing fears of a prolonged conflict.
The Ftse 100 rose around three per cent in early London trading, while Germany’s DAX climbed five per cent and the pan-European STOXX Europe 600 advanced nearly four per cent.
The waterway handles roughly one-fifth of global oil shipments and had been a focal point for market concerns.
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Ftse 100 jumps three per cent as oil prices tumble and investors scale back interest rate hike expectations
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The ceasefire also prompted a reassessment of interest rate expectations across markets, with traders now expecting just one rate increase from the Bank of England this year, likely by September, compared with previous forecasts of two to three rises.
In line with this, the Government's debt costs fell as bond yields dropped amid the improved expectations.
The 10-year gilt yield declined by 18 basis points while the five-year yield dropped 20 basis points, and the two-year yield fell 0.22 percentage points to 4.2 per cent.
Sterling also strengthened, 0.9 per cent against the dollar to $1.3416.
Despite the market reaction, uncertainty remains over the durability of the ceasefire agreement.
Jim Reid, global head of macro research at Deutsche Bank, said: "Investors are breathing a big sigh of relief that an off-ramp out of the war is being taken."
Asian markets had already recorded strong gains overnight, as South Korea’s Kospi rose 7.7 per cent while Japan’s Nikkei 225 increased 5.45 per cent.
Travel and aviation stocks led gains in London following the announcement.
International Airlines Group (IAG) rose 10 per cent while Rolls-Royce gained 11 per cent amid renewed optimism for the sector, while on the Ftse 250, easyJet climbed 11 per cent and Wizz Air advanced 15 per cent.
Banking stocks also moved higher as the outlook for economic growth improved as Barclays rose eight per cent while Lloyds Banking Group added seven per cent.
Energy companies fell as oil prices declined.
BP dropped 8.3 per cent while Shell fell 7.3 per cent, making them among the largest fallers on the index.
Centrica also declined, falling 3.5 per cent.
Donald Trumps Truth social post this morning on Iran
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Talks between Washington and Tehran are scheduled to begin in Islamabad on April 10.
Charu Chanana, chief investment strategist at Saxo Bank, said: "The ceasefire does not resolve all the underlying risks."
She added: "Investors still need clarity on whether hostilities truly stop, whether Hormuz remains reliably open, how quickly disrupted energy supply can recover, and whether the April 10 talks in Islamabad produce real progress."
Questions also remain over whether the agreement extends to Israeli operations in Lebanon, as strikes continued on Wednesday morning.
Benjamin Netanyahu, however, has indicated support for US-Iran ceasefire.
Mohit Kumar, chief European economist at Jefferies, said energy supply could take months to normalise even with the Strait of Hormuz reopened.