Key facts
- A U.S.-Iran memorandum of understanding was signed to end hostilities and reopen the Strait of Hormuz.
- Global equities initially rallied, and oil prices fell significantly on the news.
- U.S. peace talks with Iran were subsequently cancelled, casting doubt on the deal's durability and oil price stability.
- The Federal Reserve maintained interest rates but signaled a hawkish tilt, with potential for future hikes.
- The Bank of Japan raised its interest rate to 1%, a 31-year high.
- The Bank of England held rates steady at 3.75%.
Global equities initially rallied on news of a U.S.-Iran memorandum of understanding (MOU) that would end hostilities and reopen the Strait of Hormuz, leading to a significant drop in oil prices. However, optimism waned as planned peace talks in Switzerland were cancelled, raising concerns about the durability of the agreement and potential future oil price volatility.
President Donald Trump and Iranian President Masoud Pezeshkian signed the 14-point plan, which outlines an end to hostilities and the resumption of toll-free traffic through Hormuz for 60 days. The agreement's potential to bring Iranian oil back to the market as Gulf producers ramp up output could lead to an oil glut, exerting downward pressure on prices.
Despite the geopolitical developments, the Federal Reserve maintained its interest rate target range but signaled a hawkish tilt, with nearly half of its members expecting a future hike. This hawkish messaging initially caused equities to fall and Treasury yields to rise, but the market rebound was fueled by the prospect of increased crude supply easing inflation.
In other central bank news, the Bank of Japan raised its key interest rate to 1%, a 31-year high, while the Bank of England voted to keep rates on hold at 3.75%, with inflation expected to remain elevated. Meanwhile, SpaceX experienced a notable drop in its share price this week.
Looking ahead, market participants will be closely watching the U.S. personal consumption expenditures index for May, the Fed's preferred inflation gauge, and the ongoing developments in the Middle East.