By Jamie McGeever, Markets Columnist
ORLANDO, Florida (Reuters) - TRADING DAY
Making sense of the forces driving global markets
Global stocks zoomed to an all-time high on Tuesday and oil sank for a second day as a shaky truce between Iran and Israel sparked a widespread relief rally. Fed Chair Jerome Powell reiterated that rate cuts can wait while policymakers assess the impact of tariffs.
In this column, I explore why traders' dovish Fed bets may finally come good - softening U.S. data, plunging oil prices, and a surprise U-turn from a Fed hawk. More on that below, but first, a roundup of the main market moves.
Today's Key Market Moves
- Wall Street's main indices rose 1% or more, with the S&P500 and Nasdaq at new 4-month highs. The MSCI World hit a new record.
- U.S. equity volatility returned to pre-war levels, with the VIX below 18.0 - its biggest fall since May 12.
- As the dollar weakened for a third day, the euro rose to $1.1640, a level not seen since October 2021.
- Oil slumped again, with Brent crude settling 6% lower at $67.14/bbl, a day after it fell 7%.
- U.S. Treasury yields fell to their lowest since May 8, with the 2-year down to 3.806% and the 10-year to 4.285%. A $69 billion auction of 2-year notes was well-received.
Truce Triggers World Equity Whoosh
A buying frenzy engulfed world stocks on Tuesday after U.S. President Donald Trump's announcement the previous evening that Iran and Israel had agreed a ceasefire. Immediate violations from both sides didn't dampen investors' spirits, and the truce began to take hold as the day progressed.
The MSCI World index hit a fresh peak, and Asian and emerging market stocks climbed to their highest levels since early 2022. In New York, the S&P 500 and Nasdaq came within 1% and 1.5%, respectively, of their recent all-time highs.
It bears repeating that the situation is fluid, the truce is fragile, and nerves are stretched, reflected by Trump's expletive-laced rebuke of both countries early on Tuesday before he departed for a NATO summit in the Netherlands. But the market mood is buoyant. Just look at the oil price - its reversal in the first two trading days of the week has been extraordinary, with Brent crude futures recording a peak-to-trough decline of 18%.
Oil's Impact on Global Markets
Oil is a smaller input in global industry, economic activity, and inflation today compared with decades gone by, but it is still significant. Oil is now 20% lower than it was this time last year, which is good news for consumers, businesses, and from an inflation standpoint, central banks.
Fed Chair Jerome Powell's semi-annual testimony to Congress was the other main area of focus for investors on Tuesday, and they will have been relieved there was no hawkish curveball on the rate outlook. Powell repeated his position from last week's post-meeting press conference that policymakers can afford to wait and see the impact of tariffs on activity and prices before deciding their next step. "I do not want to point to a particular meeting. I don't think we need to be in any rush," he told lawmakers, distancing himself from some of his colleagues who have said recently they would consider cutting rates next month. But Powell wasn't any more hawkish than he was last week, and his steady steer helped pave the way for the rally.
Cautious Outlook for U.S. Economy
Despite the optimism washing over markets this week, there are reasons to be cautious on
