After the big drop we saw in crude oil overnight, fresh doubts have now emerged and prices have bounced off their lows, though still sharply lower on the day. In turn, the US dollar has recovered off its earlier lows, and European indices retreated slightly from their highs. On Wall Street, though, we saw fresh gains for the major indices again, with chipmakers surging on the back of positive results from the likes of AMD and SMCI. But can Wall Street hold onto its big gains given renewed doubts over US-Iran deal, and extreme valuations? For now, the softer oil backdrop has helped revive equity sentiment in Europe and accelerated the gains on Wall Street. The S&P 500 forecast remains positive for now, but we are reaching extreme levels where profit-taking could come into equation again.
Crude oil sharply off lows
Crude oil fell quite aggressively overnight when optimism surrounding a deal triggered a sell-off of more than 10%. However, oil has since rebounded about $7 off the lows on the back of a couple of conflicting reports. This shift has yet to weigh on equity indices, but in FX the majors have pulled back from earlier highs.
It’s been a rollercoaster ride for oil markets. At one point, prices dropped as much as 12%, or roughly $13, before staging a partial recovery. The rebound hasn’t been equal in magnitude, but prices have clawed back a significant portion of those losses, driven largely by headline-driven volatility.
Initially, comments from Donald Trump posted on social media raised doubts about the likelihood of an imminent US–Iran deal. This was followed by a report from New York Post suggesting it may be too early to prepare for peace talks with Iran. At the same time, other outlets, including Al Arabiya, reported that a deal could still be within reach. Bloomberg reported that Iran is evaluating a new proposal from the US to end the war, citing a person familiar with the matter.
The conflicting narratives have created significant uncertainty, and as a result, oil prices are swinging sharply. This volatility could spillover over into broader financial markets again, although so far stock markets have remained firm.
Stocks surge to record highs
While the crude oil market has only now responded to signs that the war could be over, equity markets, in particular, in the U.S., were keen to deploy capital on any constructive developments for the last two or three weeks. With the major indices already at record highs, stock markets have already priced in a lot of the positivity. Tech earnings have, on the whole, been positive, which has been another reason market are where they are. The underlying belief in the durability of the tech and AI investment cycle continues to anchor the bullish optimism. Meanwhile, we haven’t seen a collapse in economic reports. Even the forward-looking PMI data released in recent days have not been too bad, with China’s coming in better than expected overnight.
But one has to wonder where the next source of support might come from to keep markets at these lofty levels. Markets have priced in perfection and so moving forward, incoming data need to support that view to keep the optimism alive.
It is worth noting that a deal between the US and Iran is not guaranteed. For now, the more optimistic take is that Trump is eager to secure a deal ahead of a mid-May meeting with Xi Jinping, with Beijing potentially applying pressure behind the scenes.
Even so, a lasting agreement remains far from guaranteed, and in the event no deal is reached, the oil markets could tighten further, and inventories begin to draw down event more. In that scenario, the oil market could tip into a more aggressive scramble for supply, raising the risk of a sharp rebound in prices.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
