Oil prices rally, Wall Street retreats with Hormuz, inflation in focus

Oil prices surged 5% on Monday, while Wall Street indexes slipped on Tuesday as the market focused on the Federal Reserve's interest rate outlook and the potential Iran-US deal to reopen the Strait of Hormuz. Iran demanded the US meet several conditions before the waterway could reopen, causing uncertainty.

Stocks had reached a record high on Friday following a jobs report that was weaker than expected, prompting traders to reduce bets on Federal Reserve rate hikes. Europe's leading stock index remained near a record high as investors awaited a week full of economic data.

Brent crude futures increased by $4.17, or 4.99%, to $87.72 per barrel, and US West Texas Intermediate crude futures rose by $3.95, or 5.05%, to $82.13. The key event for markets this week is the US inflation reading for July on Wednesday, which will influence Federal Reserve officials' thinking on rates.

Investors will also be monitoring Eurozone employment data and US consumer price figures for hints on the interest rate outlook. Economists surveyed by Reuters anticipate the Consumer Price Index to have increased 3.4% year-on-year in July, compared to 3.5% in June.

Mohit Kumar, a senior European economist at Jefferies, stated that the Fed is expected to maintain its no-hike stance for this year, given the importance of the upcoming inflation report. If oil prices stabilize and decline from current levels, it could prevent the Fed from raising rates, Kumar added.

Asian shares climbed, with MSCI's Asia-Pacific index outside Japan finishing up 0.61% at 1,628.74. Emerging market stocks also gained 0.69% to trade at 1,669.27. Earnings have been driving stock market performance, with nearly 90% of S&P 500 results released, resulting in earnings per share up 30% year-to-date (excluding gains from Alphabet and Amazon).

A 76% earnings per share beat rate was the highest since 2021. JPMorgan strategists raised their 2026 earnings per share estimate to $365, reflecting annual growth of 35%, and increased their S&P 500 price target to $8,000 from $7,800. Current S&P 500 price is $7,758.

In the bond market, the yield on the benchmark 10-year US notes increased by 4.25 basis points to 4.701%, with the market anticipating $125 billion in fresh issuance this week. The dollar index, which gauges the greenback against a basket of currencies including the yen and euro, rose 0.17% to 99.81, while the euro dropped 0.14% to $1.1542. The Japanese yen weakened 0.94% to 159.31 per dollar, but market participants remained cautious about potential Japanese intervention.

Bank of Japan policymakers warned of mounting inflation risks that might necessitate a faster-than-expected rate hike pace, as shown in a summary of opinions from their July meeting, bolstering the case for a September rate increase. In commodities, US gold futures climbed 0.5% to settle at $4,419.70 per ounce, with spot gold rising 1.12% to $4,390.29 per ounce after touching a nine-week high.