Oil drops, stocks hit records on hopes of Hormuz opening

New York - Oil prices plummeted on Tuesday as US Treasury Secretary Scott Bessent expressed optimism over an imminent deal with Tehran to reopen the Strait of Hormuz for shipping traffic. Following the announcement, both the S&P 500 and Dow Jones surged to record highs. The positive momentum extended across European markets, with indexes in Paris, Milan, Frankfurt, and Madrid also hitting all-time highs.

The market rally followed a tech-driven surge last week, driven by concerns over AI spending and the potential economic impacts of such investments.

US corporate earnings, particularly those from AI-data mining company Palantir and construction giant Caterpillar, had outperformed expectations, further bolstering investor confidence that firms could navigate the volatility caused by the US and Israeli strikes on Iran. This bullish sentiment was underscored by Art Hogan from B. Riley Wealth Management, who noted that the market's response to recent announcements about the Strait of Hormuz was a significant factor in the rally.

Despite the optimism, investors remained cautious about the prospects of reopening the Strait of Hormuz. In fact, earlier statements of an imminent deal had not materialized, highlighting the uncertainty surrounding the situation. Just hours before the news broke, a merchant ship in the Hormuz Strait suffered a projectile strike, with one crew member reported missing and a fire erupting in the accommodation area, further emphasizing the fragility of the current scenario.

Bessent's comments to CNBC that a deal to open the strait could be reached today or tomorrow added fuel to the rally. He expressed hope that energy prices would stabilize, which he believed would be beneficial for the global economy. Market strategist Patrick Munnelly also pointed out that the market was now trying to evaluate a more nuanced geopolitical path, acknowledging the reduced risk of immediate military escalation but still uncertain about the Strait of Hormuz's full recovery.

The energy sector experienced a mixed reaction to the news. While oil majors such as BP saw significant profit growth, with its earnings more than doubling in the second quarter, BP's shares still dropped nearly 5% in London, as traders anticipated the strong growth. Meanwhile, Saudi Aramco reported a 44% surge in net profits, contributing to the overall positive stock performance. However, Lufthansa's share price fell by 8% after the airline warned that volatile jet fuel costs would impact its full-year profitability.