Shares, bonds rally as oil skid offers inflation relief

Asian share markets surged on Monday, buoyed by a significant drop in oil prices following a de-escalation of tensions in the Middle East. Brent crude slid 5.2% to $91.73 a barrel, and U.S. crude fell 5.4% to $84.45, easing inflation concerns and providing a lift to bonds.

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Net, it looks as if developments in the Middle East have moved in a positive direction over the weekend, adding some credibility to the notion that oil above $100 a barrel seems to induce de-escalatory behaviour from both sides.

The temporary halt in fighting, with Iran stating it would cease its own attacks if the U.S. reciprocated, offered a glimmer of hope for stability. However, Houthi attacks on Saudi oil facilities along the Red Sea coast underscored the continued volatility in the region.

Markets are now looking ahead to a busy week of central bank meetings, including the U.S. Federal Reserve, the Bank of England, and the Bank of Japan. While the Fed is expected to hold rates steady, uncertainty surrounds its decision due to internal divisions and the recent geopolitical events. Goldman Sachs analysts noted that a dissent in favor of a hike is likely, but most voters may refrain from a move after softer June inflation data.

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Investors see the outcome of the July meeting as unusually uncertain, likely because the Fed has been split recently, Warsh's own position remains unclear, and some of the re-escalation with Iran occurred during the blackout period.

Equities globally took comfort from the oil price pullback. S&P 500 futures rose 0.8%, and Nasdaq futures jumped 1.3%. European and Asian markets also saw gains. The focus now shifts to a wave of tech earnings, with companies like Microsoft, Meta, Amazon, and Apple set to report. Despite strong profit growth forecasts, high expectations and concerns over massive AI capital expenditures could dampen investor enthusiasm.

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There will likely be at least one dissent in favour of a hike, but most voters appear unlikely to push for a move this week after the softer June inflation data.