After US President Trump announced that Israel and Iran had reached a ceasefire agreement, the global market reacted quickly. The previously soaring oil prices fell sharply, the stock market rose, and the market risk sentiment improved.
Analysts pointed out that the inflation concerns caused by high oil prices have been greatly reduced, and the inflation and employment data have been mild, prompting the Federal Reserve to cut interest rates in July.
Trump posted on the social media platform Truth Social on Tuesday (June 24) that the ceasefire will take effect within 12 hours and the war “will be considered over.” Senior Iranian officials later confirmed that Tehran agreed to a ceasefire; Israeli media reported that Prime Minister Netanyahu agreed to a ceasefire after a call with Trump, provided that Iran stopped the attack.
After the news came out, oil prices fell by nearly 4%. In addition, Iran’s symbolic retaliation against the US base in Qatar the day before did not cause substantial damage, and oil prices fell by about 9% in two days. As of 4pm Singapore time on Tuesday, West Texas Intermediate (WTI) crude oil fell to US$66.33 (about S$85) per barrel, a drop of 3.2%, while Brent crude oil was at US$68.5, a drop of 2.85%.
The decline in oil prices reduces the risk of major inflation
Schroders economists George Brown and Malcolm Melville believe that although the ongoing conflict has disrupted the market, it may not be as serious as investors expect.
They pointed out that the global economy has a healthy oil surplus, which helps to maintain oil prices in the low to mid-$70s. This is also a historically mild range. There has not been any major disruption to oil supply in the Middle East.
“From the past record, major inflation threats usually only appear when oil prices rise by 50% or more. Brent crude oil prices must break through US$100 per barrel to have a significant impact on energy inflation.”
In terms of stock and foreign exchange markets, Asia-Pacific stock markets rose across the board on Tuesday, and US stock futures also rose. The dollar weakened, while the currencies of the European Union and Japan, which are highly dependent on energy imports, benefited from lower oil prices.
Tiger Securities market strategist Huang Jiaren pointed out that before the ceasefire, there were signs that the impact of the Israeli-Iranian conflict on the market was relatively weak. “While geopolitical tensions may cause short-term volatility, market participants may continue to focus on larger macro drivers, such as the tariff policies of the US authorities, regulatory relaxation, tax cuts and the expected tax and spending bill.”
The Fed may have a 20% chance of cutting interest rates in July
DBS Bank interest rate strategist Liao Yuming believes that with Fed Governor Bowman expressing support for a July rate cut and agreeing with another governor Waller’s view two days ago, the July interest rate meeting has now become a substantive option for the market to focus on, bringing cyclical benefits to US bonds.
“The market originally expected September to be a more reasonable time for a rate cut, because the median of this year’s dot plot suggests two rate cuts. But if the July rate cut really takes place, it will mean that the number of rate cuts for the whole year may exceed two.”
Liao Yuming pointed out that the easing of the situation in the Middle East has boosted the strength of US bonds. In addition, inflation concerns caused by high oil prices have been greatly reduced. Coupled with the mild actual inflation data in the United States in the past two months and the weakening of employment market indicators, in the current environment where the actual federal funds rate is close to 2%, it is enough to support a new round of “moderate” easing measures.
“With the release of non-farm employment and consumer price index (CPI) data at the end of the month, even if employment is strong, as long as inflation remains stable, it will be enough to prompt the Federal Reserve to cut interest rates. The current market estimate is that the probability of a rate cut in July is 20%.”