(May 26): Stocks in Asia were poised to extend gains Tuesday as optimism over a potential US-Iran deal to reopen the Strait of Hormuz lifted risk appetite and sent oil prices lower.
Equity-index futures for Japan and Australia pointed to gains, while markets in Hong Kong and South Korea were set to reopen after a holiday. US contracts were higher after markets there were also closed Monday. The dollar was steady against major peers in early trading after weakening on Monday.
The risk-on mood helped lift the MSCI All Country World Index, the broadest gauge of global equities, to a record close on Monday, with a gauge of Asia Pacific stocks rising for a third straight day.
West Texas Intermediate crude held losses early Tuesday after tumbling in the previous session, when US President Donald Trump said that negotiations with Iran over an interim deal to extend their ceasefire and reopen Hormuz were “proceeding nicely.” Pakistan’s military chief, Asim Munir, the main interlocutor between the warring sides, told China an agreement is “close to being reached.”
There is “a presumption that the Strait of Hormuz is going to be opened in the not too distant future and I think the market is betting that the supply demand situation rebalances and things are going to normalize,” said Bart Melek, global head of commodity strategy at TD Securities.
Global markets are betting the worst of the Middle East energy shock may be over after months of conflict disrupted crude supplies, stoked inflation fears and drove bond yields higher. A deal to reopen the Strait of Hormuz and extend the US-Iran ceasefire is set to further ease pressure in the oil markets and support the rally in equities.
See also: Stocks extend gains as crude oil drops on Iran
Key sticking points remain unresolved, however, including the future of Iran’s nuclear program. Iran’s Tasnim news agency reported the draft agreement could still collapse because of US objections to several provisions, including Tehran’s demand that frozen assets be released.
“A consensus was reached on many of the topics discussed, but no one can claim that the signing of an agreement is imminent,” Iran’s Foreign Ministry Spokesman Esmail Baghaei told reporters on Monday.
In other geopolitical news, Russian Foreign Minister Sergei Lavrov urged US Secretary of State Marco Rubio to evacuate American citizens and diplomats from Kyiv ahead of what Moscow said would be an escalation of strikes on the Ukrainian capital, according to a statement from Russia’s Foreign Ministry on Monday.
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Investors are also closely watching the outlook for US monetary policy. Fresh signals on inflation are due later this week from the Federal Reserve’s preferred gauge, the Personal Consumption Expenditures index, while readings across Europe will offer clues on price pressures and the direction of interest rates.
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