- Last week, the Fed hiked interest rates by 25 basis points as expected.
- Traders expect the damaged Saudi Arabian pipeline to restart soon.
- Reports revealed that Trump is ready to negotiate with Iran at the UN meeting.
Equities soared on Monday as growth stocks rebounded amid a decline in oil prices and Treasury yields. Oil fell after reports indicated that Trump was ready to talk with Iran at the UN meeting. At the same time, supply worries eased last week as the US military ensured continued oil transport through Oman’s coast.
Last week, stocks were down as market participants awaited a likely rate hike during the FOMC meeting. On Wednesday, the central bank hiked interest rates by 25 basis points as expected. Moreover, the messaging during the meeting was hawkish, with Kevin Warsh restating the need for inflation to return to their 2% target. At the same time, policymakers projected one more rate hike this year. Meanwhile, traders are expecting at least two.
The outlook for US monetary policy became more hawkish as tensions in the Middle East intensified. The war has escalated in recent weeks, causing massive supply disruptions. The latest was an attack on a major Saudi Arabian pipeline that intensified supply worries. Oil prices jumped, sending Treasury yields higher and hurting growth stocks.
The future of the war remains uncertain. However, every new development will continue to shape the outlook for rate hikes and the equity market.
S&P 500 performance (Source: Bloomberg)
Stocks got some relief on Thursday after reports that the Saudi Arabian pipeline would restart in a few days. At the same time, the country began transporting its oil via the US route in Oman, easing supply concerns.
On Monday, reports revealed that Trump was ready to negotiate with Iran at the UN meeting. The US has used economic sanctions and drone and missile attacks in an effort to get Iran to surrender. The US president has occasionally said the war will end soon since Iran cannot take any more. However, Tehran has held firm, prolonging the war and worsening the impact on the global economy. Most major central banks have pivoted to more hawkish stances, with the ECB and BoJ among those that have hiked interest rates in September.
Consequently, both countries have to reconsider negotiations. A resumption of talks will ease tensions and allow oil to pull back further. This would be bullish for equities. However, investors can only gain confidence when there is a lasting peace deal.
