Equities Higher on Hormuz Reopening Hopes

MACRO FRAME

Global markets are focused on US-Iran talks to reopen the Strait of Hormuz. The renewed negotiations between the two countries offers markets a test to distinguish between positive negotiations, or a durable de-escalation. Whether tankers can begin to move freely will be the penultimate factor in restoring optimism.

STOCK INDEX FUTURES

Equity index futures are higher overnight, with investors largely looking past the flare up in strikes on Iran amid cautious optimism around ongoing negotiations and continued support from strong recent earnings momentum. Risk sentiment is constructive overall, with lower Treasury yields and a softer dollar, while oil prices declined on hopes that disruptions in the Strait may ease. In a social media post, President Trump said that talks with Iran were “proceeding nicely,” although he noted that he was prepared to order more strikes against Iran after the US sank two IRGC ships attempting to lay mines in the Strait. Both sides have signaled progress on a memorandum of understanding that would stop the war and restart shipping through the Strait, while giving negotiators 60 days to iron out complex details regarding Iran’s nuclear program. Secretary of State Marco Rubio said that negotiating a deal to halt the conflict could “take a few days”. In the meantime, the path to lease resistance for the equities is up, as optimism surrounding US-Iran talks driving the dollar and oil prices lower should also ease market expectations over Fed policy tightening, as a restoration of oil flow should deter the central bank from raising rates.

Watch point: Details regarding tanker traffic through the Strait will be a catalyst for global markets and may significantly reprice expectations over Fed policy.

CURRENCY FUTURES

US DOLLAR: The USD index is 0.13% lower at 99.11, staying rangebound though peace-deal optimism and lower oil prices create a downward bias for the dollar and lift currencies of counties more exposed to oil flows. A detailed announcement of a peace deal and restoration of oil flows through the Strait could unwind flight-to-quality longs and see the dollar drop substantially. Still, underlying fundamentals remain mildly supportive of the dollar with US interest rate differentials. Odds of a December rate hike have fallen to 51% from 57% on Friday. While recent labor data did reveal some notable spots of weakness, the overall market narrative is that the Fed will keep a hold on rates while a growing chorus of participants are beginning to expected a move upwards in the absence of oil flows through the gulf.

Watch point: Optimism over a formal US-Iran deal will unwind flight-to-quality longs, and reduce tightening expectations, ultimately weighing on the dollar.

EURO: The euro fell 0.10% to $1.1632, while June futures are up 0.18% to $1.1644. Given Europe’s energy reliance on oil imports, any positive news regarding the US-Iran conflict is likely to lift the currency. However, that would consequently reduce expectations of policy-tightening from the European Central Bank, which could curb the upside. While if a deal were to materialize quickly, supply chains will take time to normalize, which is likely to keep inflation and interest rate concerns in place. Recent eurozone PMI data from last week highlighted major stagflation risks for the eurozone economy, as private sector activity fell sharply with the survey data pointing to a 0.2% contraction in Q2 GDP, while inflation gauges suggested eurozone CPI could be running close to 4%, deepening the dilemma for the ECB. Money markets are placing an 89% chance of a hike at the June meeting and see 58 bps of tightening by year-end, down from expectations of nearly 75 bps two weeks ago. For the euro, broader risk sentiment will continue to determine price direction, while the interest rate differential against the dollar remains unfavorable.

Watch point: While a June rate hike remains the favorable move from the ECB, a peace deal and restoration of oil flows through the strait is likely to reduce  tightening expectations.

BRITISH POUND: Sterling is 0.24% lower to $1.3469, while June futures are up 0.16% to $1.3469. The pound slipped as optimism about an Iran peace deal was tempered by US strikes on Iranian targets and comments from Secretary of State Marco Rubio that talks could still take a few days. Prospects of a durable peace agreement between the two countries is likely to offer the pound with temporary support, though pre-war macroeconomic factors are likely to continue to weigh on the currency. UK Composite PMI showed private sector activity falling to a 13-month low as input and output cost inflation remained elevated. April’s CPI data last week has offered some reassurance that inflation pressures are not entirely out of control, Services inflation at 3.2% offers the Bank of England more room to maneuver on policy given that the crude oil input cost surge (+75.4% YoY) presents real risks for pass-through into CPI over the next 2–3 quarters.

The negative impacts on business activity and lackluster hiring alongside slowing wage growth reinforce our view that the BoE has limited scope to tighten policy and that money markets are overestimating the bank’s ability to raise rates. Money markets are pricing a 13% chance of a hike at its June meeting and see 37 bps of tightening by year-end.

Watch point: We expect macro factors to pressure the pound following a formal cease in hostilities between the US and Iran. We look for GBP/USD to weaken over 2H 2026, though the pound is likely to find near-term support from positive developments out of the Middle East.

JAPANESE YEN: The yen fell 0.21% against the dollar to 159.23 yen per dollar. Sources have told Reuters that Tokyo intervened at the end of April to haul the yen away from the 160 level, confirming market suspicions of government intervention. Money markets continue to favor a rate hike at the bank’s June meeting, with odds priced at 67%, while the market sees a total of 43 bps of tightening by year-end. Apart from dollar strength and the geopolitical premium, anticipation of details surrounding the government’s additional budget plan, which markets fear will strain public borrowing, is keeping the yen on the backfoot. Meanwhile, intervention risk provides the currency support at the 160 level.

Watch point: Given the current status quo, the yen is likely to consolidate in the 157-159 range, unless policy support from the BoJ firms.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.7169 as investors digest peace prospects in the Gulf.  Labor data last week revealed a surprise 18,600 drop in employment for April, missing market forecasts of a 15,000 gain. The soft data has tempered market expectations of Reserve Bank of Australia policy tightening, with markets pushing back a fully priced rate hike to December. Still, elevated inflation pressures, which were present before the outbreak of conflict in Iran will force the RBA to maintain its tightening bias. The Aussie has been subject to rapid changes in sentiment in recent trading sessions, often trading the mood regarding developments out of the gulf. Interest rate differential support for the Aussie has slowly waned with the spread between Australian 10-year and US 10-year has recovered slightly after hitting its weakest level this year last week, now at 43 bps, though a sharp drawdown from 83 bps back in early March. Markets imply around a 11% chance of a June hike to the 4.35% cash rate, while a December hike to 4.60% is fully priced.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to keep the RBA on a tightening path.

TREASURY FUTURES

Yields are modestly lower across the curve as the latest developments in Iran offer room for the relief rally in the bonds to continue. The oil market remains the main driver in price direction, with moves lower in oil friendly to gains and vice versa. For bonds, downside risk remains Iranian opposition to peace talks. Inflation fundamentals remain structurally unfavorable, with two-year yields holding well above the upper bound of the Fed Funds rate alongside firm consumer and producer price pressures, reinforcing the higher-for-longer narrative. In macro context, median and trimmed mean inflation have both moved above 3%, while the Fed’s supercore measure has also re-accelerated past 3%, underscoring that inflation persistence extends beyond first-order oil effects. At the same time, April FOMC minutes confirmed that “many” policymakers are now leaning toward further tightening—a signal just shy of a majority that still points to growing internal support for hikes and diminishing odds of a near-term easing pivot under Warsh. Against this backdrop, yields appear to be adjusting as if the Fed is behind the curve, raising the risk of bond market pushback if policy turns prematurely accommodative, and ultimately supporting a view that bonds are likely to remain under moderate pressure and consolidate rather than sustain a durable rally.

Watch point: The path to loosening has appears nonexistent as inflation has evidently become more broad based. We no longer expect the Fed to lower rates in 2026 as building inflationary pressures are evident in stickier readings. However, a swift reopening of the Strait in the coming weeks would open the door for a path to easing.

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