On Tuesday, financial markets around the world turned green. US stock indices rushed upwards, led by technology giants, while the US dollar tested three-year lows, and government bond yields fell. What caused this fit of euphoria? The answer lies in two key stories of the day: the fragile de-escalation in the Middle East and the growing hopes that the US Federal Reserve System is about to step on the pedal of monetary policy easing.
Oil as a barometer of calm
The main source of optimism was the situation around Iran and Israel. Despite reports of new strikes, the markets focused on the main thing: the parties refrained from loud statements and threats of further escalation. But more importantly, oil tankers continued their journey through the strategically important Strait of Hormuz without any interference.
This is a signal of enormous importance for the global economy. Uninterrupted oil supplies mean that one of the main pro-inflationary risks seems to have receded. Oil prices reacted with a decrease, removing the scenario of a new round of global inflation from the agenda.
The Fed hears the market (and the market hears the Fed)
It was this reduction in inflationary risks that became a gift for the "bulls". For the Federal Reserve System, which has been fighting inflation for several years, this is a significant argument in favor of taking a pause and, perhaps, even lowering rates.
Fed Chairman Jerome Powell only fueled the fire with his cautious comments. His phrase that "many paths are possible" for monetary policy was perceived by investors as a clear hint: the door for a rate cut in July remains open. As a result, the market is now almost completely confident in two rate cuts by the end of the year, which led to a drop in the yield of 10-year US Treasury bonds to a seven-week low.
Holiday on Wall Street
The combination of these two factors — the weakening of geopolitical tensions and hopes for cheap money — created ideal conditions for the growth of stocks. The Dow Jones and S&P 500 indices added about 0.8%, and the high-tech Nasdaq grew by 1%, approaching a record high.
The real stars of the day were individual companies. Netflix and JPMorgan Chase updated their historical highs. Shares of Meta, AMD, Uber, and American Express reached multi-week peaks. This growth shows that investors' risk appetite has returned, and they are ready to invest in growth stocks.
A fly in the ointment
However, one should not succumb to boundless euphoria. If you look under the hood of the American economy, the picture is not so clear. Housing market data released on Tuesday showed the slowest price increase in 20 months, and another report even recorded an unexpected monthly decline. In addition, the US current account deficit in the first quarter widened significantly more than forecasts.
These figures serve as a reminder that the economy is still facing difficulties. And although a slowdown in some sectors may become an additional argument for the Fed in favor of lowering rates, it also carries the risk of recession.
The current rally in the market is a rally of hope. Investors are betting on the "perfect" scenario: geopolitical tensions will remain under control, inflation will continue to slow down, and the Fed will start lowering rates, ensuring a "soft landing" for the economy. However, this scenario depends on many variables, and the fragile balance can be broken at any moment. For now, investors prefer to enjoy the moment, dancing to the music played by central banks and geopolitics.