Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

Global stocks zoomed to an all-time high on Tuesday and oil sank for a second day as a shaky truce between Iran and Israel sparked a widespread relief rally, while Fed Chair Jerome Powell reiterated that rate cuts can wait while policymakers assess the impact of tariffs.

In my column today I look at why traders' dovish Fed bets may finally come good - softening U.S. data, plunging oil prices, and a surprise U-turn from a Fed hawk. More on that below, but first, a roundup of the main market moves. 

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A buying frenzy engulfed world stocks on Tuesday after U.S. President Donald Trump's announcement the previous evening that Iran and Israel had agreed a ceasefire. Immediate violations from both sides didn't dampen investors' spirits, and the ceasefire began to take hold as the day progressed. 

The MSCI World index hit a fresh peak, and Asian and emerging market stocks climbed to their highest levels since early 2022. In New York, the S&P 500 and Nasdaq came within 1% and 1.5%, respectively, of their recent all-time highs.

It bears repeating that the situation is fluid, the truce is fragile, and nerves are stretched, reflected by Trump's expletive-laced rebuke of both countries early on Tuesday before he departed for a NATO summit in the Netherlands. 

But the market mood is buoyant. Just look at the oil price - its reversal in the first two trading days of the week has been extraordinary, with Brent crude futures recording a peak-to-trough decline of 18%. 

Oil is a smaller input in global industry, economic activity, and inflation today compared with decades gone by, but it is still significant. Oil is now 20% lower than it was this time last year, which is good news for consumers, businesses and, from an inflation standpoint, central banks.

Fed Chair Jerome Powell's semi-annual testimony to Congress was the other main area of focus for investors on Tuesday, and they will have been relieved there was no hawkish curveball on the rate outlook.

Powell repeated his position from last week's post-meeting press conference that policymakers can afford to wait and see the impact of tariffs on activity and prices before deciding their next step. 

"I do not want to point to a particular meeting. I don't think we need to be in any rush," he told lawmakers, distancing himself from some of his colleagues who have said recently they would consider cutting rates next month.

But Powell wasn't any more hawkish than he was last week, and his steady steer helped pave the way for the rally. 

Despite the optimism washing over markets this week, there are reasons to be cautious on the U.S. economy. Figures on Tuesday showed that consumer confidence is falling, with pessimism toward the jobs market at its lowest level in over four years, and the current account deficit widened to a record $450 billion in the first quarter. 

Financial markets have consistently overestimated the Federal Reserve's readiness to cut interest rates in recent years. But the latest Fed chatter, softening economic data and a dramatic reversal in oil prices suggest they could be right this time.

 The central bank last week appeared to pour ice cold water on traders' hopes for a dovish steer. In the Fed's summary of economic projections, officials maintained their median 'dot plot' projection of two 25 basis point rate cuts this year. But it was an extremely close call, and they lowered their 2026 forecast to one cut from two.

The consensus view in the days that followed was that policymakers' hawkish tilt reflected their commitment to anchoring inflation expectations. Traders' projections for rate cuts this year duly slipped to under 50 basis points. 

But maybe this read was premature. 

First, concerns about rising energy prices due to conflict in the Middle East have disappeared. Even though oil rose as much as 17% in the days after the Israel-Iran war erupted on June 13, it is now back below that level. The price is plunging and late on Monday U.S. President Donald Trump announced that the two enemies had agreed on a ceasefire.

On top of that, a chorus of dovish comments from Fed officials in recent days - and not just from the usual suspects - suggests the U.S. central bank may be closer to cutting rates than thought less than a week ago.

NEGATIVE SURPRISE

There is certainly some justification for a dovish turn.

On a fundamental level, U.S. economic data is softening. Citi's U.S. economic surprises index has been falling since the end of May and is now negative, meaning that economic data is underperforming consensus expectations. Last week it fell to the lowest since September last year.