Stocks Surge, Oil and Dollar Slip on Middle East Peace Hopes

Stocks Rally as Middle East Peace Hopes Pressure Oil and Dollar

Stocks surged on Monday and the U.S. dollar slid alongside oil prices as growing optimism over a potential end to the Iran conflict boosted risk appetite. However, the lack of clarity on when the Strait of Hormuz would reopen kept enthusiasm in check.

Peace Deal Prospects Lift Sentiment

The nearly three-month war has disrupted global energy flows, driving oil prices higher and reshaping inflation expectations. Reports that Washington and Iran have "largely negotiated" a memorandum of understanding on reopening the strategic waterway encouraged investors to move out of safe havens.

U.S. President Donald Trump cautioned against rushing into a deal, but the overall tone of headlines has pointed toward a resolution, according to Chris Weston, head of research at Pepperstone. Markets are now patiently waiting for a concrete timeline.

Oil Tumbles, Equities Soar

Brent crude dropped over 4% to $98.83 a barrel, while West Texas Intermediate fell to $92.03. The euro rose 0.33% to $1.1646, and the Japanese yen firmed as the dollar weakened. Japan's Nikkei surged 3% to cross the 65,000 level for the first time, while Nasdaq futures jumped 1.2%.

"We will need to see an agreement in place in the coming sessions as there are still major sticking points," said Nick Twidale, chief market analyst at ATFX Global, warning that a sustained rally is unlikely until confirmation of the strait’s reopening.

Rate Expectations Reset as Inflation Worries Persist

Markets are now fully pricing in a quarter-point rate hike from the Federal Reserve in January 2027, a sharp reversal from pre-war expectations of two cuts. The 30-year Treasury yield briefly touched its highest since 2007 before pulling back. Consumer sentiment fell to a record low in May amid surging gasoline prices.

Newly sworn-in Fed Chair Kevin Warsh is expected to look past near-term price spikes, but RBC BlueBay’s Mark Dowding warned that the risk of further tightening remains as long as inflation stays elevated.