- The US and Iran finally reached a deal to end their war.
- Markets are expecting a reopening of the Strait of Hormuz.
- This week, traders will watch the FOMC policy meeting.
Equities rallied on Monday as traders applauded the news of a peace deal between the US and Iran. Meanwhile, oil prices collapsed, easing inflation worries. However, some analysts have warned that it could take time before supply returns to normal. Elsewhere, market participants are eagerly awaiting the FOMC policy meeting for clues on future Fed moves.
S&P 500 (Source: Bloomberg)
Last week, stocks gained as the US president remained optimistic about talks with Iran. At the start of the week, tensions in the Middle East had escalated with the US and Iran exchanging fire in the Strait of Hormuz. However, on Thursday, Trump called off planned strikes on Iran, citing progress in talks. As a result, risk appetite improved.
The big news came out on Saturday when the US president posted that a peace deal was finally complete and would be signed soon. Iran also released a similar report, saying the signing ceremony would be held on Friday. The result was a sharp rebound in risk appetite which supported equities.
A deal at last means that the Strait of Hormuz will be reopened. At the same time, the US blockade on Iranian ports will end. An end to supply disruptions would allow oil prices to pull back easing pressure on central banks to tighten monetary policy.
“Markets have been waiting for this news for months, and the relief is already showing, with oil sliding and risk assets catching … after President Trump confirmed that the Strait of Hormuz will reopen and the US naval blockade will be lifted,” said Josh Gilbert, lead analyst for APAC at eToro.
The Fed has faced intense pressure to hike interest rates due to a spike in inflation. Oil has risen by about 30% since the war in Iran started. This rise has increased the cost of living. The last US inflation reading showed price pressures at a 3-year high. Meanwhile, market participants have been pricing a 70% likelihood of a rate hike in December.
Higher borrowing costs hurt businesses, weighing on equities. However, the S&P 500 has made record highs due to strength in the tech sector.
This week, traders will watch the FOMC policy meeting for clues on what the Fed will do next. Policymakers might remain cautious despite the news of a deal.