- Remarks from US and Iranian officials at the UN dashed hopes for a near-term peace deal.
- Trump rejected Iran’s peace proposal.
- Traders increased the likelihood of an October Fed rate hike from 49% to 75%.
Equities dropped at the start of the new week as Treasury yields extended last week’s gains. Uncertainty surrounding the war in Iran heightened inflation concerns. Consequently, there was a sharp increase in bets for an October Fed rate hike that boosted yields. Meanwhile, growth stocks, especially in the tech sector, dropped.
10-year yield (Source: Bloomberg)
Oil prices recovered last week while Treasury yields rallied after remarks from US and Iranian officials at the UN dashed hopes for a near-term peace deal. The comments revealed that neither country is ready to compromise or surrender. Therefore, it will be difficult to agree since both nations have their own conditions for a deal. At the same time, it became clear that the war could last longer than expected.
After the UN meeting, reports revealed that Iran sent the US a peace proposal to resume the terms of their June agreement. However, Trump rejected it. He had initially said that he would annihilate Iran if there was no deal to end the war. Therefore, market participants were worried about a return to drone and missile attacks.
“If you ask us, there is no reason why we should go back to diplomacy, but I am still trying diplomacy because I think we shouldn’t miss any chance for peace,” Iranian Foreign Minister Abbas Araghchi said. “We are ready to negotiate as much as we are ready to face any challenge … We stand firm in the face of any aggression against us, even if it comes to a doomsday war.”
By the end of the week, traders had increased the likelihood of an October Fed rate hike from 49% to 75%. Higher borrowing costs are bad for stocks, especially in the tech sector. AI spending means these companies borrow heavily. As a result, stocks like Micron Technology and Advanced Micro Devices dragged equities lower on Monday.
Some good news came on Monday that Trump was willing to give Iran sanctions relief on nuclear matters. However, it is still a long way from a lasting peace deal.
Elsewhere, the US is set to release its monthly employment report on Friday. The numbers will further shape the outlook for Fed rate hikes.
