Global markets surged after the US and Iran reached an interim agreement to reopen the Strait of Hormuz, a crucial channel for about 20% of the world's oil supplies. This news significantly eased concerns over energy supply disruptions and fueled a broad "risk-on" rally across various asset classes. MSCI's Asia Pacific Index jumped around 3%, while US and European equity futures gained more than 1.2%. Japan's Nikkei 225 briefly topped 70,000 for the first time before closing with a modest gain of 0.1% after the Bank of Japan raised its benchmark interest rate to 1% [financialjuice.com, wjhl.com].
Oil prices experienced a sharp decline as geopolitical risk premiums unwound. Brent crude fell more than 4% to settle at $78.96 a barrel, its lowest level in three months, while US West Texas Intermediate (WTI) crude slid 5.5% to test the $75 area. This is a considerable drop from Brent's May peak of $126.41. The restoration of Middle Eastern oil flows is expected to alleviate pressure on global energy markets and reduce a key source of inflation risk for central banks [financialjuice.com, wjhl.com, thestar.com.my, tmgm.com].
Bond markets also reacted positively, with Treasuries advancing as investors scaled back expectations for Federal Reserve interest rate hikes. Yields on shorter maturities, sensitive to monetary policy changes, led the decline. The two-year Treasury yield fell as much as seven basis points to 4.01% before ending around 4.07%, while the benchmark 10-year yield was lower by about one basis point to 4.47% after earlier dropping to 4.42%. Swaps traders are now pricing in less than an 80% chance of a quarter-point Fed hike by December, with a full hike not anticipated until March 2027. Tomo Kinoshita, a global market strategist at Invesco Asset Management Japan Ltd., noted that a 10% decline in oil prices could lead to an approximate 13-basis point decline in US 10-year Treasury yields [thestar.com.my, wjhl.com].
Currency markets reflected this improving risk appetite, with the US Dollar weakening against major peers. The euro rose 0.4% to $1.1617, and sterling gained 0.3% to $1.3446. Despite the broad market rally, analysts like Alyce Andres, macro strategist at Bloomberg's markets live, cautioned that the lack of detailed information and upcoming technical negotiations mean that markets are likely to view the framework as a promising first step rather than a final resolution, which could limit a deeper rally in treasuries and put a floor under crude oil prices [thestar.com.my].
