(May 7): Stocks climbed around the world, joining gains in bonds as oil retreated on hopes the US and Iran are nearing a deal to end a war that has jolted markets and clouded the economic outlook.
Stronger risk appetite drove equities to record highs, lifting the S&P 500 by 1.5%. Solid corporate earnings also buoyed sentiment, with Advanced Micro Devices Inc leading a rally in chipmakers. US crude settled around US$95, easing inflation concerns. Gold jumped. Treasury yields slipped as bets on Federal Reserve rate hikes receded. The dollar fell to pre-war levels.
The US and Iran were circling around a fresh proposal to end a nearly 10-week conflict. Washington presented a memorandum of understanding that would gradually reopen the Strait of Hormuz and lift the blockade on ports, according to a person familiar with the matter.
“Iran cannot have a nuclear weapon, and they won’t, and they’ve agreed to that, among other things,” President Donald Trump told reporters at the White House. “We’ve had very good talks,” he said, “and it’s very possible that we’ll make a deal.”
Trump said the war has “a very good chance of ending” and there’s a possibility that happens before his trip to Beijing next week, according to an interview with PBS News Hour. China’s top diplomat called for the swift reopening of Hormuz in a meeting with his Iranian counterpart.
“We remain on the path towards de-escalation, and towards an end to the conflict,” said Michael Brown at Pepperstone. “While that path is clearly a rough one, so long as we remain on it, and the direction of travel remains a more optimistic one, then risk appetite should remain underpinned.”
See also: Stocks fall on doubts over imminent US-Iran deal
Iran has laid out an updated process for ships seeking to transit Hormuz, but several shipowners said they remained cautious about sending their vessels through the waterway. The Islamic Revolutionary Guard Corps said “safe, stable passage” will be possible with “new protocols in place.”
Investors also parsed the latest economic data ahead of Friday’s jobs report. US companies boosted payrolls in April by the most in over a year, the latest evidence of stabilization in the labor market.
Fed Bank of St Louis president Alberto Musalem said there’s uncertainty over the future path for the economy and monetary policy, but he sees risks rising more for inflation than for employment. His Chicago counterpart Austan Goolsbee warned against reflexively lowering rates in response to faster productivity growth, as the phenomenon can sometimes drive up prices.
See also: Stocks rise to record and oil falls as truce holds
Meantime, the Treasury signaled it’s comfortable issuing the shortest-dated debt to meet escalating government borrowing needs. It anticipates keeping nominal note and bond sale sizes unchanged “for at least the next several quarters.”
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