London/Singapore: Stocks surged on Monday, while the US dollar and oil prices fell as the prospect of a deal to end the Iran war boosted risk appetite. However, uncertainty over when the Strait of Hormuz would reopen kept enthusiasm in check.The nearly three-month conflict in the Middle East has sharply driven up energy prices and reshaped the global rates outlook, as inflation concerns intensified following Tehran’s effective closure of the key strait. US President Donald Trump said on Sunday that he had instructed his representatives not to rush into any deal with Iran, and his administration played down expectations of an imminent breakthrough.Just a day earlier, Trump said Washington and Iran had “largely negotiated” a memorandum of understanding on a deal that would reopen the waterway, which previously carried one-fifth of global oil and liquefied natural gas shipments.Chris Weston, Head of Research at Pepperstone, said markets have become less focused on the timing of a resolution and more attentive to the tone of developments.“The tone has been consistently towards some sort of resolution... We’ve become very patient about a resolution deadline,” he said.The pan-European STOXX 600 rose 0.7% to 629.24, while Nasdaq futures climbed 1.4% and S&P futures gained 1%. Liquidity is likely to be thin, as several markets, including Britain and the United States, are closed on Monday.Stocks remained steady despite comments from Iran’s foreign ministry spokesperson on Monday indicating that, although many issues had been agreed, this did not mean Tehran was close to signing a peace deal.Oil prices set the tone for marketsFor much of the year, oil prices have guided broader markets, as investors assessed often conflicting signals from Washington and Tehran, with both sides engaged in talks since a fragile ceasefire took hold in April.On Monday, oil prices fell to two-week lows, with Brent crude futures down $4.81, or about 5%, at $98.73 a barrel, while US West Texas Intermediate stood at $91.79 a barrel, also down nearly 5%.Analysts expect oil prices to remain elevated even if a resolution is reached in the near term, as supply chain disruptions caused by the conflict will take time to resolve.Last week, Barclays maintained its 2026 average Brent crude oil price forecast at $100, though it noted risks are skewed to the upside.The euro rose 0.3% to $1.1634, while the Japanese yen strengthened to 158.96 per US dollar as the safe-haven dollar gave up some of its recent gains.In Asia, Japan’s Nikkei jumped roughly 3%, surpassing the 65,000 level for the first time, while Taiwan’s stock market also closed at a record high of 43,644.Global equities have largely shrugged off war concerns, focusing instead on artificial intelligence developments and a strong corporate earnings season, which have driven markets to record highs this year.Rate expectations resetThe rise in energy prices since the conflict began, along with the risk of prolonged disruption, has led traders to price in interest rate hikes across both developed and emerging markets.Markets are now fully pricing in a 25-basis-point increase from the US Federal Reserve in January 2027—a sharp shift from expectations before hostilities erupted in late February, when two rate cuts this year had been anticipated.The yield on the 30-year US Treasury bond, seen as a measure of geopolitical and fiscal risk, briefly reached its highest level since July 2007 last week but has since retreated. While there was no cash trading on Monday, 30-year futures rose by a full point.Data released on Friday showed US consumer sentiment fell to a record low in May, as surging petrol prices linked to the Iran war intensified affordability concerns, coinciding with Kevin Warsh being sworn in as Chair of the Federal Reserve.“For the Federal Reserve, this creates a difficult balancing act,” said Bruno Schneller, Managing Partner at Erlen Capital Management.“On one hand, consumers are feeling the strain of higher borrowing costs, slower income growth and weaker hiring, but on the other, inflation remains high,” he added.
