By Ankur Banerjee and Ruth Chai
SINGAPORE, May 25 (Reuters) – Stocks surged on Monday while the U.S. dollar and oil prices slid as the prospect of a deal to end the Iran war buoyed risk appetite although a lack of clarity over when the Strait of Hormuz would open kept enthusiasm in check.
The nearly three-month-long conflict in the Middle East has driven energy prices sharply higher and reshaped the global rates outlook, as inflation concerns intensify following Tehran’s effective shutdown of the key strait through which a significant share of the world’s energy flows.
U.S. President Donald Trump said on Sunday he had told his representatives not to rush into any deal with Iran, as his administration played down hopes of an imminent breakthrough.
Just a day earlier, Trump said Washington and Iran had “largely negotiated” a memorandum of understanding on a deal that would reopen the waterway, which carried one-fifth of global oil and liquefied natural gas shipments before the war.
Chris Weston, head of research at Pepperstone, said markets have become less focused on the timing of a resolution and instead been keeping an eye on the tone of the headlines.
“The tone has been consistently towards some sort of resolution… We’ve become very patient for a resolution deadline.”
OIL PRICE SETS THE TONE FOR MARKETS
For much of the year, oil prices have steered broader markets as investors sift through often conflicting signals from Washington and Tehran, with both sides locked in negotiations since a fragile ceasefire took hold in April.
On Monday, oil prices hit two-week lows to kickstart the week with Brent crude futures down over 4% to $98.83 a barrel, while U.S. West Texas Intermediate was at $92.03 a barrel, also down over 4%. [O/R]
The euro was up 0.33% at $1.1646, while the Japanese yen firmed to 158.85 per U.S. dollar as the safe-haven dollar gave up some of its recent gains.
Nasdaq futures were 1.2% higher and S&P futures were up 0.7%. Japan’s Nikkei jumped 3% to roar past the 65,000 level for the first time. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1%.
Nick Twidale, chief market analyst at ATFX Global, expects the market to embrace more risk during the session but a sustained surge is unlikely until there is confirmation that the Strait of Hormuz will reopen.
“We will need to see an agreement out in place in the coming sessions as we know there are still some major sticking points,” he said.
Liquidity is likely to be thin as markets in the U.S., UK, Hong Kong and South Korea are closed.
RATE EXPECTATIONS RESET
Prolonged energy disruptions from the conflict risk pushing up prices worldwide, prompting traders to bet on further rate hikes across both developed and emerging markets.
Markets are now fully pricing in a 25-basis-point hike from the U.S. Federal Reserve in January 2027, a sharp shift from expectations before hostilities erupted in late February, when two rate cuts this year were anticipated.
The 30-year Treasury bond’s yield, which is seen as a barometer of geopolitical and fiscal risk, briefly touched its highest level since July 2007 last week but has pulled back from that milestone. There was no cash trading on Monday but 30-year futures climbed 17 ticks.
Data on Friday showed U.S. consumer sentiment fell to a record low in May as surging gasoline prices linked to the Iran war intensified affordability concerns just as Kevin Warsh was sworn in as chair of the Fed.
Mark Dowding, CIO for Fixed Income at RBC BlueBay Asset Management, said Warsh is likely to look past near-term elevated price data, but warned that the risk of a rate hike will continue to build as long as inflation remains on an upward trajectory.
(Reporting by Ankur Banerjee and Ruth Chai in Singapore; Editing by Stephen Coates and Shri Navaratnam)
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