Stocks and bonds rallied on Wednesday while the US dollar weakened after a report suggested the United States and Iran were moving closer to an agreement aimed at ending the war, triggering a sharp decline in oil prices.
According to a report by Axios, the US and Iran are nearing a one-page memorandum that could potentially end the conflict.
The report stated that the US expects responses from Iran on several key points within the next 48 hours.
However, the report cautioned that no agreement has been finalised yet, despite describing the current stage as the closest the two sides have come to a deal since the war began.
European stocks climb sharply
European equity markets reacted positively to the developments, with investors shifting towards sectors that are closely tied to economic growth.
Europe’s broad STOXX 600 index rose 2.2% during the session.
Energy-sensitive and economically exposed sectors led the gains, particularly banks and mining companies.
At the same time, oil and gas stocks moved lower following the decline in crude prices, as traders anticipated reduced geopolitical risks in the Middle East.
The sharp fall in oil prices reflected growing optimism that tensions between the U.S. and Iran could ease if negotiations progress further.
Bonds rally as yields decline
Government bonds also gained strongly, pushing yields lower across major markets.
The yield on benchmark US 10-year Treasury notes fell 6 basis points to 4.35% as investors moved into safer fixed-income assets.
European government bonds outperformed after coming under pressure in recent weeks.
Germany’s 10-year bond yield dropped 7.5 basis points to 2.99%, while the country’s rate-sensitive two-year bond yield fell 10 basis points to 2.658%.
The move came as traders reduced expectations for the scale of interest rate hikes they anticipate from the European Central Bank later this year.
Markets appeared to interpret the easing geopolitical tensions and falling oil prices as factors that could reduce inflationary pressure, potentially lowering the need for aggressive monetary tightening.
British and Italian yields fall further
Bond markets in Britain and Italy posted even steeper declines in yields during the session.
British government bond yields fell 10 basis points, while Italian yields declined 12.5 basis points on the day.
The broad rally in sovereign debt markets highlighted improving investor sentiment after the Axios report raised hopes of a diplomatic breakthrough between Washington and Tehran.
Dollar weakens against euro and pound
The US dollar also came under pressure following the report.
The euro rose 0.6% against the dollar to trade at $1.1762, while the British pound also gained 0.6% to reach $1.3618.
Currency markets reflected a broader shift away from defensive positioning as investors responded to the possibility of reduced geopolitical risks and lower energy prices.
The combined rally in equities and bonds, alongside the weaker dollar and falling oil prices, underscored how sensitive global markets remain to developments surrounding the conflict and ongoing diplomatic negotiations.
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