- Iran closed the Strait of Hormuz on Monday, creating uncertainty about the future.
- The US-Iran two-week ceasefire deal will end on Tuesday.
- US inflation figures have missed forecasts, raising bets for a rate cut.
Equities ended lower on Monday after gapping down from the previous session’s close amid a sentiment shift. Stocks had recorded a solid week as hopes for an end to the Iran war boosted risk appetite. However, uncertainty returned with the new week, pausing the rally.
S&P 500 performance (Source: LSEG, Prof G Media)
The two-week ceasefire deal between the US and Iran has fueled a rally in the equities market. With the deal, hopes for an end to the destructive war rose. The two countries were ready to hold more talks with the aim of a longer-lasting deal. As a result, oil prices pulled back, and inflation worries eased. At the same time, expectations of a Fed rate cut edged higher.
However, things began to fall apart when the talks collapsed. Additionally, the US military moved to block the Strait of Hormuz, which had begun to reopen to traffic. Still, market participants held on to hopes after Trump said the two countries would try negotiating again in Pakistan. Moreover, by Friday, Iran announced that the Strait of Hormuz was completely open. As a result, equities concluded the week on a positive note.
However, panic returned to the markets over the weekend after reports that the US had seized an Iranian cargo ship. It also became evident that Iran was unwilling to continue negotiations in Pakistan. To make matters worse, Iran closed the Strait of Hormuz on Monday, creating uncertainty about the future.
The two-week ceasefire deal will end on Tuesday. It remains unclear what will happen after that. If the two countries continue working towards peace, equities will keep climbing. On the other hand, a return to strikes and bombs would send oil prices higher and weigh on equities.
“It’s pretty clear to us that equity markets are viewing things with a glass half full,” Patrick O’Donnell, chief investment strategist at Orbis, said on Monday.
“What we’re focused on is whether the Strait of Hormuz is actually going to reopen again.”
Elsewhere, the US earnings season is underway, and analysts are forecasting solid reports. Meanwhile, traders are also watching US data for clues on the state of the economy and future Fed policy moves. So far, inflation figures have missed forecasts, raising bets for a rate cut this year. Lower borrowing costs favor business growth, boosting equities.