Share markets have surged in Asia while the dollar slipped and oil prices tumbled as a tentative peace deal between the United States and Iran promised to ease inflationary pressures globally and lessen the need for higher interest rates.
Pakistani Prime Minister Shehbaz Sharif said on social media early on Monday that a deal had been struck, while President Donald Trump said the agreement included opening the vital Strait of Hormuz, without giving details.
Trump will meet with Middle Eastern leaders and attend a working session with Ukrainian President Volodymyr Zelenskiy during a G7 summit in France this week.
Iran said traffic through the strait would be regulated by it and Oman, a potential blow to the rules of free trade and suggesting there might be a toll of some sort on shipping.
“The lack of details especially on freedom of shipping is a concern but not one that should constrain markets today as the surge in risk appetite plays out,” said Sean Callow, a senior FX analyst at ITC Markets.
“The prospect of a sustained fall in energy prices changes the conversation for central banks just ahead of a flurry of policy decisions.”
The news will be a relief for the crowd of central banks meeting this week, easing some of the pressure to tighten policy to head off an energy-driven rise in inflationary expectations.
Markets had already priced in a likely deal but the confirmation was enough to send Brent crude falling four per cent to $US83.80 ($A118.98) a barrel, well away from its May peak of $US126.41 ($A179.48).
US crude slid 4.7 per cent to $US80.89 ($A114.85) a barrel, but was still above the $US67 ($A95) level it traded at before the war began.
“We see Brent oil futures falling to $US80 b ($A114 b)y the end of the year assuming the strait does not close again,” said Vivek Dhar, a mining and energy analyst at CBA.
“Our forecast implicitly assumes that oil and refined product exports can resume quickly through the Strait of Hormuz, but this view carries considerable uncertainty tied to the damage to oil and refinery assets.”
The prospect of cheaper oil will be a boon to Japan which is a net importer of energy, and the Nikkei climbed 3.0 per cent. South Korea’s red-hot market gained 4.3 per cent, while MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1.5 per cent.
In Europe, EUROSTOXX 50 futures and DAX futures both rose 0.2 per cent, while FTSE futures added 0.3 per cent.
S&P 500 futures climbed 0.9 per cent, while Nasdaq futures jumped 1.5 per cent amid a general surge in risk assets.
Central banks are due to meet in the US, UK, Japan, Australia, Switzerland, Sweden, Norway and Russia this week, with Japan considered the one likely to lift rates this time.
The Federal Reserve is widely expected to leave rates at 3.50 per cent-3.75 per cent on Wednesday at Chair Kevin Warsh’s debut meeting.
The statement, economic projections and news conference will be scrutinised for any signals of the Fed dropping its easing bias as officials grow more hawkish on inflation risks.
Investors were quick to trim the chance of a hike this year with December futures edging up four ticks while a move as early as October is now priced around 45 per cent.
Treasuries rallied on hopes that oil prices would now fall sustainably and lessen the upside risks for inflation. Yields on two-year notes dropped 6 basis points to 4.02 per cent.
The drop in yields and general improvement in risk pulled the US dollar broadly lower, with the euro rising 0.4 per cent to $1.1608. The dollar dipped 0.2 per cent on the yen to 159.90 , while sterling rose 0.3 per cent to $1.3446.
The Bank of England is expected to hold rates at 3.75 per cent on Thursday and through 2026, with policymakers seen in no rush to tighten. The BoE’s vote split and monetary policy report will be of interest.
Top-tier UK data includes May inflation and retail sales, and April employment. Thursday’s Makerfield election will also be watched, as a win for Labour Mayor Andy Burnham could set up a leadership contest against Prime Minister Keir Starmer.
In commodity markets, the drop in yields helped non-interest-paying gold climb 1.9 per cent to $US4,300 ($A6,105) an ounce.
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