US Stocks Surge as Middle East Optimism Grows – S&P up 1.8% to Fresh Record
US equity markets pushed sharply higher again overnight as optimism around a potential peace deal in the Middle East continued to build. The S&P 500 gained 1.79% to close at a fresh record high of 7,736, while the Dow Jones climbed 1.71% to finish at 54,085. The Nasdaq once again led the advance, surging 2.59% to close at 26,584 as improving geopolitical sentiment continued to support risk appetite, and investors remained confident in the outlook for global markets.
US Treasury yields extended their recent decline as expectations of easing inflationary pressures increased alongside the sharp fall in energy prices. The 2-year Treasury yield dropped 4.6 basis points to 4.192%, while the benchmark 10-year yield fell 6.3 basis points to 4.613%. Despite the move lower in yields, the US Dollar Index was largely unchanged, slipping just 0.01% to 99.88 as traders continued to balance lower rate expectations against the improving risk environment.
Oil prices came under further heavy pressure as reports of progress in talks between the US and Iran increased hopes that tensions in the region could ease and supply concerns would begin to unwind. Brent crude fell another 5.99% to US$78.75 a barrel, while WTI dropped 5.69% to US$75.77. The sharp decline in energy prices is also helping to ease concerns around the inflation outlook, which has been reflected in the recent move lower in Treasury yields.
Gold moved higher in contrast, benefiting from the softer yield environment to rise 0.58% and close at US$4,076.01 an ounce. The precious metal continues to trade within its recent range, with traders balancing lower yields and ongoing geopolitical risks against the improving prospects for a de-escalation in the Middle East.
Oil Under Pressure on Peace Hopes – But Risks Remain to the Upside
Oil prices fell sharply overnight as growing optimism around a potential diplomatic resolution to the conflict in the Middle East eased fears of prolonged disruption to global energy supplies. The latest moves came after U.S. and Qatari officials pointed to progress in discussions with Iran, including efforts to improve the flow of shipping through the Strait of Hormuz. U.S. officials suggested a deal could potentially be reached as soon as Tuesday or Wednesday, although no final agreement has yet been confirmed.
For oil traders, the key issue now is whether these diplomatic efforts actually deliver a lasting agreement. The sharp decline in prices has effectively priced in a significant degree of de-escalation and a return towards more normal flows through the Strait of Hormuz.
If a deal fails to materialise, however, some of that premium could quickly return to the market. Any renewed escalation or continued restrictions around the Strait of Hormuz would raise fresh concerns over global supply, potentially sending Brent and WTI sharply higher from current levels.
With oil having fallen more than 5% in a single session, on top of a 5% drop the day before, the market is now particularly sensitive to the next geopolitical headline. A successful deal could keep pressure on prices, but a breakdown in negotiations could see the recent oil sell-off reverse rapidly.
Geopolitical Update to Remain in Focus Today
There is a little more on the macroeconomic calendar today, with New Zealand employment data kicking off the Asian session. The data was released early in the day, and the Unemployment Rate rose by 0.2% to 5.6%, weighing on the Kiwi. There is little else out in the Asian session today, and it’s a similar story in the London day. However, things heat up once the New York session starts. The ADP Non-Farm Employment data (exp. 68k) and the ISM Services PMI (exp. 54.5) will provide further clues on the health of the US economy. However, any comments from President Trump when he speaks later in the day will also be closely watched, given the ongoing developments in the Middle East.
Geopolitical developments are again likely to remain the dominant driver of sentiment as the day progresses. Markets have responded strongly to signs that talks between the US and Iran may be progressing, particularly through the sharp decline in oil prices and continued gains across equity markets, so any fresh headlines suggesting progress or a breakdown in negotiations could quickly trigger further volatility across risk assets, the dollar, oil, and gold.
