A broker from Jefferies noted that a potential US-Iran agreement could influence investor views on interest rate changes this year more than on equities. Risky assets would likely rise further and rates fall if a deal occurs, though the rates market appears positioned for a stronger response than stocks. Equities remain viewed positively, yet the simplest phase of gains may have passed. S&P positioning sits just above 5 and Eurostoxx at plus 2.2. While not overly stretched, no large further advance is expected beyond initial relief. European shares could gain in the short term due to lighter positioning compared with the US. Rates positioning leans short, with US Treasuries near minus 4 and Bunds close to minus 3. Recent rate rallies prompted some short covering, but additional room exists. The front end in Europe, the UK and the US is still seen as mispriced. The ECB may deliver one hike in June to support inflation credibility, yet no series of increases is anticipated. The next moves for the Fed and BoE are expected to be cuts. UK markets have priced in only 35 basis points of hikes this year. The BoE is projected to move rates toward 3 percent by mid-next year. For the Fed, no hikes are foreseen and the focus remains on timing of cuts. Near-term inflation may stay elevated, complicating early reductions, though political factors and falling oil prices below 80 dollars could shift views toward treating the shock as transitory. The base case calls for two rate cuts over the next 12 months. Brent crude is on track for one of its largest monthly declines, nearing a 17 percent drop since early May. Hopes center on a US-Iran accord extending a ceasefire by 60 days and reopening the Strait of Hormuz. Details matter, including requirements for Iran to open the strait, transfer enriched uranium and halt its nuclear program. Geopolitical news drove markets yesterday, aided by softer US PCE inflation data that reduced expectations for rate hikes. Headline PCE rose 0.4 percent in April against a 0.5 percent forecast, while core PCE increased 0.2 percent versus 0.3 percent expected. The probability of a Fed hike by December fell to 59 percent. Some officials indicated policy is appropriately set, though one noted a possible scenario for an increase under certain conditions. Asian equities advanced on deal hopes, with the Nikkei gaining 2.65 percent, the Hang Seng rising 0.9 percent and the Kospi climbing 3.6 percent. AI enthusiasm also supported gains, as TSMC shares increased 2.6 percent and Samsung Electronics rose 6 percent.
