Optimism about potential US-Iran diplomacy spurred a significant rally across global markets, with stocks and bonds seeing gains while crude oil prices plunged. The S&P 500 rose 1.5%, nearing its highest level since early June, and the Nasdaq 100 climbed 1.9%. The Dow Jones Industrial Average also increased by 1.2%, and the MSCI World Index saw a 1.2% rise. This surge in risk appetite was also supported by solid earnings reports, with megacap companies leading the charge, including Amazon.com Inc. whose value topped $3 trillion.
The decline in oil prices was a key factor in the market's positive performance, with US crude sinking below $80 a barrel. Brent crude was trading 5% lower at $83.47 a barrel, and US West Texas Intermediate dropped more than 5% to $79.47 a barrel. This drop in oil was attributed to cooling tensions in the Middle East, specifically Iran's suggestion that negotiations to reopen the Strait of Hormuz were progressing. Former President Donald Trump also mentioned that a major attack on the Islamic Republic was called off, and peace talks were about to resume, with the Strait potentially being fully open by the next day as "phase one."
Bond markets also experienced a rally, with Treasury yields falling after last week's volatility. The yield on 10-year US Treasuries declined five basis points to 4.68%, a retreat from its highest level since January. Similarly, Germany's 10-year yield declined five basis points to 3.15%, and Britain's 10-year yield dropped 10 basis points to 4.95%. Analysts like Kathleen Brooks from XTB noted that lower oil prices and easing inflation fears would help support markets and dampen bond yields.
Despite the positive market reaction, analysts like Chris Larkin at E*Trade from Morgan Stanley cautioned that the on-again, off-again nature of US-Iran diplomacy means earnings and jobs data would need to continue to drive the market. Mark Hackett at Nationwide echoed this, stating that labor-market data and earnings would determine if stocks can build on their recent resilience. However, Ian Lyngen at BMO Capital Markets suggested that the market might be laying the groundwork for its next breakout after absorbing various market pressures.
US manufacturing activity expanded in July at its fastest pace in over four years, driven by strong demand, surging production, and increased employment. This robust economic data, combined with positive Q2 earnings reports—86% of the 307 S&P 500 companies that have reported Q2 earnings beat estimates—provided a bullish backdrop for stocks. The S&P 500, Dow Jones Industrial Average, and Nasdaq 100 all posted significant gains, supported by the easing geopolitical tensions and the resulting drop in crude oil prices.
