Stocks surged today while the US 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.
US 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, Mr 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."
European futures rose 1%, pointing to a strong open, while Nasdaq futures were 1.4% higher and S&P futures were up 1%. Liquidity is likely to be thin as markets in the US and UK are closed on Monday.
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 about 6% to $97.75 a barrel, while US West Texas Intermediate was at $90.87 a barrel, also down nearly 6%.
Analysts expect oil prices to remain 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.
The euro was up 0.33% at $1.1646, while the Japanese yen firmed to 158.85 per US dollar as the safe-haven dollar gave up some of its recent gains.
In Asia, Japan's Nikkei jumped 3% to roar past the 65,000 level for the first time and Taiwan stocks also jumped to a record high.
Global stocks have mostly shrugged off war worries and instead have focused on all things AI and a strong earnings season, which has led to equities hitting record highs through the year.
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.
Markets are now fully pricing in a 25-basis-point hike from the US 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 point.
Data on Friday showed US 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 Mr Warsh was 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.
