- US equities soar on the hopes of easing the Middle East crisis.
- The 30-year bond auction results, soft inflation, and a weaker dollar give a boost to stocks.
- The FOMC meeting is eyed now for fresh impetus, as markets expect a dovish signal by the Fed.
The US equities surged on Monday as investors appreciated the easing Middle East crisis, resulting in lower oil prices. The Dow Jones Industrial Average gained around 0.8%, which is more than 300 points. The S&P 500 also gained 0.9%, marking fresh all-time highs. The tech-heavy NASDAQ soared by 1.5%, outperforming others as the growth stocks related to AI and semiconductor chips showed renewed enthusiasm.
A primary driver for Monday’s rally was Iran’s willingness to de-escalate conflict with Israel, which led to easing the fears of regional instability. This resulted in declining oil prices by 1.3%, which relieved the inflationary pressure weighing on risk sentiment. Lower energy prices are generally cheered as they boost corporate margins, equity valuations, and consumer spending, especially in interest-rate-sensitive sectors like technology.
Investors also welcomed the 30-year US Treasury bond auction results of $22 billion. It showed a strong demand and pushed the long-term bond yields slightly lower. This also helped curb the fiscal deficit concerns and higher interest rates and reinforced the view that disinflation remains on track. Last week’s US CPI and PPI data for May also supported this view.
Currency markets also echoed similar sentiment as the Bloomberg Dollar Index fell to a 3-year low. A weaker dollar means it’s positive for earnings of large-cap stocks, making US exports competitive abroad.
The structural perspective also supports equities, as corporate stock buybacks are at historic levels. Apple recently sanctioned a $100 billion buyback program while IP activity stays subdued. This limited supply coupled with institutional inflow and retail investors, keeps the momentum underpinned.
One overlooked factor behind the recent stock rally is the continued commitment of US households to the equity markets. Recent data reveals that American retirement accounts hold a $9 trillion value in equities, with the average stock portfolio rising from 66% in 2013 to 70% now. Retail investors have also poured $20 billion into equities in the last quarter alone.
Looking forward, investors will be focusing on the Federal Reserve’s meeting tomorrow. The geopolitical risk and softening inflation are convincing market participants to look for dovish signals that may further boost equities. However, any surprise move by the Fed may erode the gains quickly.
