Oil prices fell sharply and government bonds rallied on Monday as a pause in military action between the US and Iran eased fears of further escalation in the Middle East, prompting a broad recovery across risk assets, according to a report by Bloomberg.
Brent crude fell as much as 7.4% to below $90 a barrel before recovering some ground. Despite the latest retreat, the global benchmark remains more than 50% higher this year following supply disruptions and heightened geopolitical risk in the region.
The decline in energy prices helped drive a rally in fixed income markets by easing immediate concerns about a renewed inflation shock. The yield on the 10-year US Treasury fell five basis points to 4.63%, while European bond futures and government debt across Asia also advanced.
The dollar, which had benefited from safe-haven demand during the conflict, weakened against all of its Group-of-10 counterparts. Gold rose by around 1% to trade close to $4,100 an ounce.
Asian equities gained, with the MSCI Asia Pacific Index rising 0.8%, while Nasdaq 100 futures climbed 1.4%, pointing to a recovery in technology stocks following last week’s selloff in chipmakers. European equity futures also moved higher.
For macro hedge funds, the easing in Middle East tensions provides a sharp reversal from the oil-driven inflation shock that had dominated markets in recent weeks. The focus now turns to whether the apparent pause develops into negotiations, as well as how central banks respond to the recent swings in energy prices.
Brent briefly traded above $100 a barrel last week after the escalation in hostilities. The US has reportedly refrained from further strikes since late Friday, while Iran’s military said Sunday that it had also halted its response.
The Federal Reserve’s policy decision on Wednesday will be a key event for rates traders. Although the spike in oil prices had raised concerns that policymakers could be forced to tighten monetary policy, a softer-than-expected reading of US consumer inflation for June has provided the central bank with more room to remain on hold.
The Bank of England and Bank of Japan are also scheduled to announce policy decisions this week.
Technology stocks will provide another major test for investors. Earnings from Microsoft and Meta Platforms are due on Wednesday, followed by Apple and Amazon on Thursday. Asian chipmakers Samsung Electronics and SK Hynix are also set to report.
The results will be closely watched amid growing investor scrutiny of the huge capital spending programmes being undertaken by technology companies to build out artificial intelligence infrastructure.
