European stock markets have hit a record high at the start of trading, with the pan-European Stoxx 600 index jumping 0.9% to 639 points, surpassing the previous record high set just before the Iran war began. As reported by The Economic Times, shares are rising across London, Frankfurt, Paris, Madrid and Milan, with mining and travel companies driving the rally while oil company shares are sliding. The relief over the US-Iran peace deal is rippling across global markets, providing investors with a clear reason to dial back geopolitical risk premiums that have hung over markets since the conflict began.
Euro zone government bond yields steadied on Tuesday after touching a more than two-week low the day before, following a preliminary agreement between the U.S. and Iran to end their war and reopen the Strait of Hormuz. According to The Economic Times, Germany's two-year yield, which is sensitive to changes in ECB rate expectations, was up 0.5 bps at 2.577% after falling to a two-week low of 2.547% on Monday. The agreement to reopen the vital waterway, which saw one-fifth of the world's oil and gas flow through it before the war, should ease pressure on energy supplies, which pushed front-month Brent crude futures to their lowest level since March 10. Lower energy prices have dampened worries about higher inflation and slowing growth, and helped reduce expectations for further policy tightening from major central banks, including the European Central Bank.
The bond market decline was driven by oil prices falling more than 5% following the US-Iran peace framework announcement. As reported by The Economic Times, the deal marked the biggest breakthrough towards resolving the conflict that has killed thousands and upended energy markets since it began with joint U.S.-Israeli strikes on Iran in February. US crude oil has dropped to its lowest level since the second week of the Iran war, with the cost of a barrel of West Texas Intermediate (WTI) light sweet crude dropping 6% today to $79.72 per barrel, the first time since 10 March that it has been under $80/barrel. Brent spot price is now back to its lowest level since early March at c.$83 per barrel as markets digest the increasingly optimistic tone of the US-Iran framework agreement. According to Investing.com, the prospect of deflating price pressures triggered a buying frenzy for European sovereign debt, with crude oil plummeting in response to the peace deal.
Euro zone bond yields stabilized after a recent dip as investors have trimmed their expectations for further interest rate hikes by the European Central Bank following the peace agreement. As reported by The Economic Times, money market futures are fully pricing in 32 bps of tightening by the ECB by the end of the year, implying one quarter-point hike and around a 30% chance of another. Interest rate futures priced in 27 basis points of tightening by the Bank of England by the end of the year, with a quarter-point rate increase not fully priced in until December, compared to nearly 50 basis points last Wednesday. According to Jefferies economist Mohit Kumar, "Our view remains that a deal implies that ... the ECB should be done with its rate hiking cycle." ECB President Christine Lagarde on Monday welcomed news of the peace agreement, but other policymakers, including Germany's Joachim Nagel, said there would be no immediate relief on inflation because it would take months to restore oil supply to its pre-war level.
Mortgage borrowers are breathing a sigh of relief at the news of a peace deal in Iran, with average mortgage rates having dipped slightly even before this morning's drop in UK bond yields. According to Moneyfactscompare.co.uk, the average 2-year fixed residential mortgage rate today is 5.61%, down from 5.62% the previous working day, while the average 5-year fixed residential mortgage rate is 5.58%, down from 5.59% the previous working day. As reported by The Economic Times, while the Bank of England was not expected to follow the European Central Bank's lead from last week and raise interest rates this Thursday, the peace deal should dramatically reduce the risk of Base Rate rising to 5.25%, potentially pushing typical rates on new mortgages towards 6.75%. The relief extends to other European markets, with Italy's 10-year note also hitting two-week lows as the prospect of deflating price pressures boosted European sovereign debt demand.
