SINGAPORE, May 25
Stock markets saw gains on Monday, while the U.S. dollar and oil prices dipped. This shift was largely attributed to the possibility of a deal to bring an end to the ongoing conflict in Iran, even though there remains uncertainty regarding the reopening of the Strait of Hormuz.
The ongoing conflict in the Middle East has had a significant impact on energy prices, which have surged and altered the global interest rate outlook. Concerns over inflation have only intensified due to the Iranian government’s effective blockade of a crucial maritime route.
On Sunday, President Trump indicated that he advised his representatives to take their time in negotiating a deal with Iran, suggesting that his administration was playing down expectations for a quick resolution.
Just a day prior, he had stated that progress was being made between the United States and Iran, with a memorandum of understanding reached regarding plans to reopen the vital waterway, which was responsible for transporting a fifth of the world’s oil and liquefied natural gas before hostilities began.
Chris Weston from Pepperstone noted that the market seems to be more focused on the tone of the news rather than the timeline of any resolutions. He commented, “The tone has consistently suggested some type of resolution is in play… We’ve been quite patient regarding the deadline for resolution.”
European futures were up by 1%, Nasdaq futures rose by 1.4%, and S&P futures also increased by 1%. However, trading volumes were expected to be lower on Monday due to market closures in both the U.S. and UK.
Meanwhile, oil prices were reacting to these market dynamics, with Brent crude hitting a two-week low at $97.75 per barrel and U.S. West Texas Intermediate dropping to $90.87 per barrel, both down nearly 6%.
Analysts believe that even if a temporary solution is found, oil prices are unlikely to revert to pre-war levels, given that the disruptions to the supply chain caused by the conflict will take time to resolve.
Last week, Barclays reiterated its forecast of an average Brent oil price of $100 for 2026, though it acknowledged that risks have increased.
The euro strengthened by 0.33% to $1.1646, while the Japanese yen rose to $158.85, indicating a slight softening of the dollar’s recent gains.
In Asian markets, Japan’s Nikkei Stock Average soared by 3% to surpass the 65,000 yen mark for the first time, with Taiwanese stocks hitting record highs. MSCI’s index for Asia-Pacific stocks outside Japan also increased by 1%.
Global stock markets have largely overlooked concerns regarding the conflict in favor of focusing on advancements in AI and strong earnings, which have propelled stock prices to new highs this year.
Rate Expectations Adjusted
The rise in energy prices since the onset of the conflict, along with the potential for prolonged high prices due to continued disruptions, has led traders to forecast interest rate hikes in both developed and emerging markets.
Markets are now pricing in a 25 basis point increase in Federal Reserve interest rates for January 2027, a significant shift from previous expectations which anticipated two rate cuts this year prior to the escalation of hostilities.
The 30-year Treasury yield, seen as an indicator of geopolitical and fiscal risk, recently peaked at its highest level since July 2007 before pulling back. There was no spot trading on Monday, but futures for the 30-year bond increased by 1 point.
Recent data revealed that U.S. consumer sentiment plummeted to an all-time low in May, coinciding with Kevin Warsh’s commencement as the Federal Reserve’s chairman, as soaring gasoline prices tied to the Iran conflict raised affordability concerns.
Mark Dowding of RBC BlueBay Asset Management suggested that Mr. Warsh would likely consider short-term growth figures but also warned that the risk of rate hikes persists as inflation continues to trend upward.
