Stocks inch up, oil dips as traders eye US-Iran talks

Global equities edged higher on Wednesday, accompanied by a dip in oil prices, as market participants closely watched diplomatic talks aimed at resolving the conflict with Iran. Encouraging U.S. inflation data, showing a modest rise in consumer prices for July, also tempered expectations for an imminent interest rate hike by the Federal Reserve.

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The data relieves some of the concerns that the Fed is being pushed toward a rate hike due to inflation, which is being fueled by higher energy prices.

The U.S. Consumer Price Index (CPI) increased by 0.1% in July, aligning with forecasts. This subdued inflation reading could weaken the case for the Federal Reserve to raise interest rates at its upcoming meeting. Money markets had been pricing in approximately a 50% chance of a hike prior to the data release. Analysts noted that the data alleviates concerns about the Fed being compelled to increase rates due to inflation fueled by rising energy prices.

In response to the inflation data and reduced rate hike bets, gold prices saw an increase of over 1%. However, the CPI figures did not encompass the most recent surge in oil prices, which have climbed amid heightened tensions between the U.S. and Iran. Despite these tensions, including separate reports of ship attacks by the U.S. and Yemen's Iran-aligned Houthis, oil prices declined as investors factored in lower demand forecasts.

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Our base case for a long time has been a gradual but messy de-escalation.

Markets continue to track negotiations concerning the Iran war and the potential reopening of the Strait of Hormuz to shipping. Iran's top security official reiterated that the Strait would remain closed unless U.S. conditions are met. Nevertheless, investors appear relatively calm, with some anticipating a gradual de-escalation that could maintain a floor under oil prices and contribute to energy-driven inflation in the near to medium term.

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We don’t expect traffic (through the Strait of Hormuz) to go to its full capacity. We think that puts a floor on the oil price and maintains an energy-driven inflationary driver in markets in the near- to medium-term.