Stocks jump while oil and dollar ease on Iran peace hopes
Market Reactions to Iran Peace Prospects
By Nell Mackenzie and Ankur Banerjee
LONDON/SINGAPORE, May 25 (Reuters) - Stocks surged and the U.S. dollar and oil prices slid on Monday 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.
Uncertainty Over Peace Deal Timing
U.S. President Donald Trump said on Sunday he had told his representatives not to rush into any deal with Iran and 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," he said.
Stock markets brushed off comments from Iran's foreign ministry spokesperson on Monday saying that while many topics had been agreed, this did not mean Tehran is close to signing a peace deal.
Stock and Bond Market Movements
The pan-European STOXX 600 climbed around 1% to 631.1, while Nasdaq futures were 1.4% higher and S&P futures were up 1%. However, liquidity was likely to be thin, with several markets including in Britain and the United States closed for public holidays.
The euro zone government bond market was on a tear, with Germany's 10-year government bond yields hitting their lowest since April 8, last down almost 10 basis points while Italy's 10-year yields fell to their lowest since April 17.
Oil Price Sets the Tone for Markets
OIL PRICE SETS THE TONE FOR MARKETS
For much of the year, oil prices have steered broader markets, as investors sift often conflicting signals from Washington and Tehran since a fragile ceasefire took hold in April.
Recent Oil Price Movements
On Monday, oil prices hit two-week lows, with Brent crude futures down over $5, or about 4.9%, to $98.45 a barrel, while U.S. West Texas Intermediate was at $91.67 a barrel, also down about 4.9%. [O/R]
Analysts expect oil prices to stay elevated even if there is a resolution in the near term, and they are unlikely to return to levels before the war as it will take time to remedy supply chain disruption from the conflict.
Last week, Barclays maintained its 2026 average Brent crude oil price forecast at $100, though it said risks are skewing higher.
Currency and Asian Market Reactions
The euro was up 0.3% at $1.1640, while the Japanese yen firmed to 158.91 per U.S. dollar as the safe-haven dollar gave up some of its recent gains. [FRX/]
In Asia, Japan's Nikkei jumped roughly 3% to roar past the 65,000 level for the first time and Taiwan stocks rose to 43,644, both closing at record highs.
Global stocks have mostly shrugged off war worries to focus instead on all things AI and a strong earnings season, which has pushed equities to record highs through the year.
Rate Expectations Reset
RATE EXPECTATIONS RESET
The increase in energy prices since the conflict began and the risk that prolonged disruptions will keep them high has prompted traders to bet on rate hikes across both developed and emerging markets.
Federal Reserve and Treasury Yields
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 were up a full percentage point.
Consumer Sentiment and Inflation Concerns
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.
"For the Federal Reserve, this creates a difficult balancing act," said Bruno Schneller, managing partner at Erlen Capital Management.
On the one hand, consumers feel the pinch of higher financing costs, lower income growth and softer hiring, but on the other, inflation remains high, Schneller said.
(Reporting by Nell Mackenzie in London and Ankur Banerjee in Singapore; Additional reporting by Ruth Chai in Singapore; Editing by Amanda Cooper, Gareth Jones and Gus Trompiz)
