US equities rally on Iran diplomacy hopes as oil retreats
Investors welcome easing energy costs and diplomatic progress, though Federal Reserve rate expectations shift and housing data reveals regional divergence.
US stock markets advanced on Monday, driven by a decline in oil prices and growing optimism that diplomatic negotiations between Washington and Tehran could de-escalate tensions in the Middle East. The Dow Jones Industrial Average climbed 0.3 per cent, the S&P 500 rose 0.5 per cent, and the tech-heavy Nasdaq Composite led the gains with a 0.8 per cent increase. This positive sentiment emerged despite recent military engagements in the Strait of Hormuz, where the United States conducted self-defence strikes in southern Iran and the Islamic Revolutionary Guard Corps fired at US aircraft.
Energy markets reacted swiftly to the shifting geopolitical landscape. West Texas Intermediate crude futures fell 3 per cent to $92 per barrel, while Brent crude dropped roughly 4 per cent to trade at $96 per barrel. The pullback in energy prices helped fuel a broader market rally, with US oil falling 8.4 per cent over the previous week, marking its steepest weekly decline since mid-April. Lower crude costs have provided relief to investors, although elevated energy prices continue to complicate expectations for Federal Reserve policy.
Market participants are now pricing in a higher probability of rate increases. According to the CME Group’s FedWatch tool, traders are assigning an 8.5 per cent chance of a Federal Reserve rate hike in July, a sharp rise from just 0.9 per cent one month ago. This shift reflects concerns that persistent inflationary pressures, partly driven by energy costs, may delay the anticipated cycle of rate cuts that had previously supported equity valuations.
Beyond the energy sector, housing data indicated a softening in demand across much of the country. The S&P CoreLogic Case-Shiller 20-City Composite Home Price Index rose 0.83 per cent in March from a year earlier, down from a 0.9 per cent annual increase in February. Home prices are now falling in over half of the nation, with Seattle recording the steepest year-over-year drop of 2.5 per cent. Conversely, markets in the Northeast and Midwest remained comparatively stronger, with Chicago reporting a 6.1 per cent annual increase.
Structural changes in the equity markets were also highlighted, with Apollo Global Management chief economist Torsten Sløk noting that the number of exchange-traded funds now exceeds the total number of US publicly listed companies. This trend, accelerated by regulatory changes in 2019, has seen the number of ETFs double since 2020. Meanwhile, individual corporate results showed mixed outcomes, with AutoZone shares falling 5 per cent in premarket trading after quarterly revenue missed analyst estimates, despite earnings per share beating expectations.
