Iran’s foreign minister met Pakistan’s interior minister on Friday to discuss proposals to end the US-Israeli war, Iranian media reported, with Tehran and Washington still at odds over Tehran’s uranium stockpile and controls on the Strait of Hormuz.
The S&P 500 was on track for its eighth straight weekly gain, driven by booming demand for artificial intelligence (AI)-related stocks as investors largely downplayed the potential economic fallout from the Middle East conflict and the energy shock.
That strength was only partly mirrored in major European and Asian stock indexes, which made some ground this week but lagged behind the US rally.
“Our view is that equities will likely move higher over the medium term, based on a combination of strong earnings, oil prices that stay contained enough to avoid a broader growth shock, and a Federal Reserve that remains supportive,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said.
UBS forecasts Brent crude at US$105 at the end of September and US$95 at year-end and believes “that the bar for a Federal Reserve hike remains high.”
MSCI’s main world stocks index rose 0.21%. Europe’s STOXX 600 was up 0.43% and on track for a weekly gain of 2.8%.
Nasdaq futures climbed 0.11% and S&P 500 futures increased 0.13%. The S&P 500 index edged 0.17% higher on Thursday at 7,445.72, after hitting 7,517.12 last week, a fresh record high.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.74%. Japan’s Nikkei gained 2.8%, led by AI-related shares.
“Oil prices have also moved higher again as investors weigh the risk that talks drag on or fall apart,” said Matt Britzman, senior equity analyst at Hargreaves Lansdown.
“The honest answer is that nobody really knows where these negotiations are heading, but for now, markets are doing what they often do when a potential geopolitical off-ramp appears – tentatively moving as if the good news could be around the corner.”
Oil prices up but well below recent highs
Brent crude futures rose 2.5% to US$105.28 a barrel but were set for a 3.8% drop for the week. They hit US$126.41 in late April.
Prolonged energy disruptions threaten to feed through to prices across the globe, spurring traders to price in rate hikes.
Markets are now pricing in a more than 50% chance of a rate hike from the US Federal Reserve by the end of the year, according to the CME FedWatch tool, versus expectations of two rate cuts before the war started.
That has lifted Treasury yields and boosted the US dollar, which has also benefited from safe-haven demand.
The euro was at US$1.1614, close to the six-week low it hit on Thursday, and is set for a 1% drop this month.
Against a basket of currencies, the dollar was up 0.18% at 99.37. The Japanese yen last fetched ¥159.11 per dollar, perilously close to the crucial 160 level that traders fear could bring Japanese authorities into the market again.
“Energy prices need to rapidly and quickly reverse, otherwise the combination of fiscal spending and a capex boom is a recipe for a lot of inflation, especially in the US,” said George Saravelos, global head of forex research at Deutsche Bank, after mentioning a global increase in fiscal spending and AI investment.
Incoming Federal Reserve chair Kevin Warsh “will have to pick between adding volatility to front-end rates, and help the dollar, or the back-end, and hurt the dollar, but he can’t avoid both,” Saravelos said.
Fed rate hikes push up short-dated yields, while no action by the central bank could boost long-dated borrowing costs as markets price in more inflation over the long term.
The European Central Bank has been pricing three rate hikes by year-end since March.
The dollar remained firm against the yen following an intervention worth an estimated US$65 billion from Tokyo just weeks ago to shore up the currency. It was last up 0.1% at ¥159.125.