Monday, May 26, opened with a powerful risk-on wave as global financial markets cheered reports that the US and Iran are closing in on a deal. The MSCI All Country World Index rose 0.4% to a record closing high. Japanese equities surged more than 3% to all-time highs. Europe's Stoxx 600 climbed to its highest level since the Iran war began, though trading volumes were thin with the US (Memorial Day) and UK (Spring Bank Holiday) closed for the day.
The biggest move came from oil markets. WTI crude plunged about 5% to around $94 a barrel, while Brent fell below $98. President Trump posted over the weekend that "an agreement has largely been negotiated" to reopen the Strait of Hormuz, while cautioning not to rush. Secretary of State Marco Rubio said the deal is still a work in progress, though "some good news" could come in the coming days.
Why It Matters
The Strait of Hormuz is one of the world's most critical oil chokepoints. Its closure over recent months, following the US-Iran military confrontation, caused the largest disruption to global oil supply on record. A reopening would bring significant volumes back to market — and push prices sharply lower.
Bonds and the Dollar
The 10-year US Treasury yield fell about 10 basis points to 4.54%, driven entirely by lower real yields (now ~2.1-2.2%), while breakeven inflation expectations remain anchored at ~2.4%. Goldman Sachs warns that if global real yields continue rising, "nothing good" follows. Long-duration Treasuries rallied, with TLT climbing to $84.7.
The dollar weakened against all G-10 peers. EUR/USD rose to 1.165, GBP/USD to 1.350. The DXY dollar index slipped to 98.99, reflecting continued softness in the relative weight of the US economy.
Bank of Israel in Focus
The Israeli shekel strengthened markedly. USD/ILS dropped from 2.898 last week to 2.878 today — a 0.7% gain in days. The TA-35 index surged to 4,527, up nearly 4% in a week, as geopolitical risk premium compressed on Iran deal optimism. The Bank of Israel's next rate decision is due shortly. Inflation remains above target, and while an Iran deal could ease price pressures near-term, economists expect the central bank to proceed cautiously.
US Rate Outlook
New Fed Chairman Kevin Warsh was sworn in Friday, promising "the biggest shakeup in decades" at the central bank. Markets are fully priced for a rate hike by year-end. Yet BlackRock argued this week that Warsh may have grounds to cut rather than hike. US PCE data — the Fed's preferred inflation gauge — and European inflation prints due later this week will guide expectations.
Gold and Precious Metals
Gold surged more than $50 to $4,560 an ounce, and silver jumped 3%. A weakening dollar, falling real yields, and geopolitical optimism drove investors back into precious metals.
HSBC's Warning
From HSBC's weekly macro review: "Even if the Strait reopens swiftly, the risk of supply shocks and the impact on global inflation and growth will endure. So we now forecast that more central banks will raise policy rates, even in the event of a near-term peace deal."
The Bottom Line
Markets are euphoric — record highs in equities, cheaper oil, a softer dollar, and a strengthening shekel. Beneath the surface, however, real yields are rising, inflation may prove stubborn even without expensive oil, and central banks could tighten just as the market expects relief. This week's PCE print and signals from the Bank of Israel will set the tone for the weeks ahead.
