Stocks fall as higher oil prices, Treasury yields rise

US stocks declined on Monday due to surging oil prices and US Treasury yields, as investors considered the likelihood of an Iran peace deal and the potential impact on the Federal Reserve's interest rate trajectory. Crude prices rose following US President Donald Trump's rejection of an Iran peace agreement, although they eased on expectations that Qatari mediators would negotiate a settlement between the two nations.

Following a dip in early April, oil prices have recently surged as optimism over a possible peace deal has waned. This increase in crude and diesel fuel costs has heightened inflation concerns, causing US Treasury yields to climb alongside remarks from Fed officials suggesting more rate hikes may be necessary if inflation remains persistent following the central bank's recent 25 basis point rate increase.

Jack Ablin, chief investment strategist at Cresset Capital Management, noted that interest rates are becoming increasingly attractive compared to equities, a situation not seen in nearly two decades. The Dow Jones Industrial Average dropped 347 points (0.7%), the S&P 500 fell 59 points (0.8%), and the Nasdaq Composite decreased 248 points (0.9%).

Boeing shares suffered the most significant decline among Dow stocks, falling 6.9%, after the Federal Aviation Administration announced a delay in certifying the long-delayed 737 MAX 10 due to a newly discovered software issue. Nvidia shares, however, increased by 1.6% after the company announced a US$150 billion share repurchase authorization, the largest in history.

Iran announced a peace proposal at the recent United Nations General Assembly, relayed to the US through Qatari mediators. Despite President Trump's initial rejection of the offer, he later told Axios that he anticipated US negotiators would continue discussions that week. Federal Reserve Governor Lisa Cook stated on Monday that she anticipates ongoing inflationary pressures in the coming months due to AI-related demand and higher oil prices, though she did not explicitly state that additional rate hikes would be required.

Expectations for a Fed rate hike at the October meeting have risen, driven by economic data indicating robust economic growth. Currently, markets price in a 70.3% probability of a 25 basis point increase at the Fed's upcoming meeting, up from 57.6% a week ago and 17.7% a month earlier.