Buoyant investor risk appetite on hopes a deal to reopen the Strait of Hormuz may be close. Global equities make solid gains pushing the MSCI world index to an all time high. Brent crude falls contributing to lower bond yields

Oil and the US dollar fell while global equities rose as markets reopened for the week. Investor risk appetite improved on hopes a deal to reopen the Strait of Hormuz may be close, with senior US officials saying negotiations with Iran were advancing despite unresolved language. S&P 500 futures rose 1% and Nasdaq 100 futures 1.4%, though US cash markets were closed for Memorial Day. In Europe, the Euro Stoxx gained 2%, while the Nikkei rose 3%, lifting the MSCI All Country World Index to a record high.

President Trump said talks on an interim deal with Iran were progressing. The two sides are working toward a memorandum of understanding that would halt the fighting and ease restrictions on shipping through the Strait of Hormuz for 30 days, while paving the way for second-phase talks on Iran’s nuclear program. Discussions in Doha, involving senior Qatari officials, also covered the possible release of frozen Iranian funds. However, key issues remain unresolved, including freedom of passage through Hormuz and the timing of any asset release.

Brent crude fell sharply, touching US$96 per barrel overnight compared with around US$104 at the end of last week, in thinner-than-usual trading with US and UK markets on holiday. The move came as tentative signs emerged of a pickup in shipping activity. Ship-tracking data showed a supertanker carrying Iraqi crude to China had left the Persian Gulf and passed through the US-controlled blockade and three liquefied natural gas tankers appear to have exited.

Global bond markets rallied alongside the fall in energy prices. Although the US cash Treasury market was closed, futures implied a decline of about 7bp in 10-year yields relative to Friday’s close. The market gapped lower at the open yesterday morning (NZT), with implied yields continuing to edge down overnight. The rally was supported by a paring in Fed tightening expectations. After fully pricing a 25bp hike by December following Governor Waller’s hawkish comments late last week, markets now imply around 16bp of tightening by year-end. 10-year German bunds closed 9bp lower at 2.94%.

Japan’s Prime Minister Sanae Takaichi said the government would fund its supplementary budget without increasing bond issuance this calendar year, seeking to ease concerns about fiscal deterioration. The package, worth just over ¥3 trillion, is expected to be submitted to parliament as early as next week and will focus on energy support. JGBs rallied, with yields falling across the curve in line with moves in other sovereign bond markets as oil prices declined.

The US dollar fell as risk appetite improved, with the Australasian currencies among the strongest performers in the G10. Most of the move occurred at yesterday’s global open, with only modest net changes overnight. NZD/USD traded in a narrow 15-pip range overnight, hovering around 0.5875 as market holidays subdued FX activity.

Price action in NZ rates in the local session yesterday was driven by offshore developments. The swap curve ended lower and steeper, with the front end leading the rally. Two-year swap rates closed 6bp lower at 3.51%, back toward the lows for the month, as the market looks ahead to Wednesday’s Monetary Policy Statement. Pricing implies around a 15% chance of a 25bp hike, down sharply from as high as 50% two weeks ago. Ten-year swap rates fell 4bp to 4.29%, while government bond yields moved in line to 4.64%, near the lower end of the 4.60%–4.80% range that has held over the past two months.

Australian government bond futures are little changed since the local close yesterday suggesting limited directional bias for NZ rates on the open.

Stuart Ritson is a senior Markets Strategist at BNZ Markets.