GLOBAL MARKETS-Stocks rally, while oil and dollar ease on Middle East peace hopes

Stocks surged on Monday, while the U.S. dollar and oil prices ‌slid ​as the prospect of a deal to end the Iran war buoyed risk appetite, although a lack of clarity over when the Strait of Hormuz would open kept enthusiasm in check.

The nearly three-month-long conflict in the Middle East has driven energy prices sharply higher and reshaped the global rates outlook, as inflation concerns intensify following Tehran's effective shutdown ‌of the key strait. U.S. President Donald Trump said on Sunday he had told his representatives not to rush into any deal with Iran and his administration played down hopes 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 carried one-fifth of global oil and liquefied natural gas shipments before the war.

Chris Weston, head of research at Pepperstone, said markets have become less ‌focused on the timing of a resolution and instead been keeping an eye on the tone of the headlines. "The tone has been consistently towards some sort of resolution... We've become very patient for a resolution deadline," he said. The ‌pan-European STOXX 600 was up 0.7% at 629.24, while Nasdaq futures were 1.4% higher and S&P futures were up 1%. Liquidity is likely to be thin, as several markets, including Britain and the United States, are closed on Monday.

Stocks did not seem to wobble, despite comments from Iran's foreign ministry spokesperson on Monday saying that while many topics had been agreed, this did not mean Tehran is close to signing a peace deal. OIL PRICE SETS THE TONE FOR MARKETS

For much of the year, oil prices have steered broader markets, as investors sift often conflicting signals ⁠from Washington and Tehran, ​with both sides locked in talks since a fragile ceasefire took ⁠hold in April. On Monday, oil prices hit two-week lows, with Brent crude futures down $4.81, or about 5%, to $98.73 a barrel, while U.S. West Texas Intermediate was at $91.79 a barrel, also down nearly 5%. Analysts expect oil prices to stay elevated even if there is a resolution in the ⁠near term, and they are unlikely to return to levels before the war as it will take time to remedy supply chain disruption from the conflict. Last week, Barclays maintained its 2026 average Brent crude oil price forecast at $100, though it said risks are skewing higher. The ​euro was up 0.3% at $1.1634, while the Japanese yen firmed to 158.96 per U.S. dollar as the safe-haven dollar gave up some of its recent gains.

In Asia, Japan's Nikkei jumped roughly 3% to roar past ⁠the 65,000 level for the first time and Taiwan stocks to 43,644, both closing at record highs. Global stocks have mostly shrugged off war worries to focus instead on all things AI and a strong earnings season, which has pushed equities to record highs through the year.

RATE EXPECTATIONS RESET The increase ⁠in ​energy prices since the conflict began and the risk that prolonged disruptions will keep them high has prompted traders to bet on rate hikes across both developed and emerging markets. Markets are now fully pricing in a 25-basis-point hike from the U.S. Federal Reserve in January 2027, a sharp shift from expectations before hostilities erupted in late February, when two rate cuts this year were anticipated. The 30-year Treasury bond's yield, which is seen as a barometer of geopolitical and ⁠fiscal risk, briefly touched its highest level since July 2007 last week, but has pulled back from that milestone. There was no cash trading on Monday, but 30-year futures were up a full point. Data on Friday showed U.S. ⁠consumer sentiment fell to a record low in May as ⁠surging gasoline prices linked to the Iran war intensified affordability concerns just as Kevin Warsh was sworn in as chair of the Fed.

"For the Federal Reserve, this creates a difficult balancing act," said Bruno Schneller, managing partner at Erlen Capital Management. On one hand, consumers feel the pinch of higher financing costs, lower income growth and softer hiring, but on ‌the other, inflation remains high, Schneller said.

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