Oil prices decline on deal hopes, as market looks towards a busy June

We reach another weekend with still no formal agreement between Iran and the US to end the war in the Middle East and reopen the Strait of Hormuz. The prospect of a resolution has been dangled all week, but according to the US vice president, there are still several sticking points to work out before an agreement can be reached.

This has not stopped markets from anticipating a deal will be struck. US stocks made fresh record highs on Thursday, and stock indices across Europe and Asia are also set to post gains this week, as volatility falls. Asian stocks have outperformed their European and US peers in the last trading week of May. Japan’s Nikkei and South Korea’s Kospi are both higher by more than 7% this week, compared to a 2% rise for the S&P 500 and a near 3% gain for the Nasdaq. The FTSE 100 is an outlier, it is barely eking out a weekly gain, as it absorbs the decline in BP’s share price caused by the abrupt resignation of its chairman, and a decline in commodity prices which are also hurting the UK’s oil majors and miners.

The oil price is also tumbling back towards $90 a barrel for Brent crude. The oil price is down a further 2% today, bringing its weekly decline to 12%. When the oil price falls this sharply, some stocks are virtually guaranteed to rise. Overall, May has been a good month for stocks and a bad month for the oil price. UK Bonds have been the major outperformers in the sovereign debt space this month, and UK 10-year yields are down 25bps, and 30-year yields are lower by 27bps.

This suggests two things: firstly, Andy Burnham’s recent commitment to the UK’s fiscal rules is placating the market, secondly, inflation fears, rather than political fears, are the dominant threat to UK Gilts. If the oil price falls, then inflation fears abate, which boosts the attractiveness of UK government debt.

If the market is already pricing in an end to the war in the Middle East, then what other themes could drive markets? The key theme for June will be central banks and what they do next. Below are some main events to watch for in  the month ahead:

1, The Fed meeting

The next FOMC meeting is 16-17^th June. There is a 90% chance priced in by the market that rates will remain unchanged, but this is a major meeting as it is the first one where Kevin Warsh is in charge. Inflation is surging in the US, April CPI rose to 3.8%, the highest level since 2023, as the energy price spike bites. The focus for this meeting will be whether the FOMC drops its easing bias. If we see the May CPI rate released on 5^th June, also rise by more than expected, then expectations will grow that the Fed will signal that rates will remain higher for longer, which may challenge the recent stock market rally.

2, UK political risk

The 18^th June is a pivotal day for the UK. There is a Bank of England meeting, a by-election that could see Andy Burnham return to Westminster and challenge Kier Starmer for PM, and it’s the start of the World Cup. The by-election is huge for the UK. Earlier this month, Burnham spooked bond markets but he soon u-turned on several positions including extending borrowing and breaking the UK’s fiscal rules. This U-turn was taken at face value by the market, and UK Gilts staged a strong recovery in the last 2 weeks. Even so, we believe that Gilt market volatility could remain a key theme in June, as the market watches for an even further lurch to the left from the Labour government, and a sign that the BOE is starting to worry about inflation.

3, AI stock market frenzy

Semiconductor stocks and AI have driven US indices to record highs in the past month. A strong Q1 earnings season, especially for tech, has also boosted stock markets. The top performing stocks in the US include Micron, which became a trillion dollar company this week, Qualcomm, SanDisk and AMD. Can the AI theme continue to trump tariff and geopolitical risks? There are concerns about the sustainability of the pace of capex, and concerns about the dollar, which is weakening this month. Valuations for tech giants soared in May, as we move into June, investors will be looking for earnings upgrades to justify these valuations and to keep the AI rally going.

3, The dollar

The USD is weakening, as the market prices in an end to the Middle East war. This can impact dollar sensitive stocks, such as oil companies. This is a problem for the FTSE 100, as Shell and BP earn in USD, which are worth less when the pound is strengthening. It could also boost the outlook for some EM trades, so we may see some rotation on the back of a weaker dollar, which may provide some respite for EM stocks and currencies, which have been hard hit by geopolitical risks in recent months.

4, The deal

We are already past the 3-month mark in the US/Iran war. The market is still expecting a deal to be agreed, but so far that has been elusive, with neither side willing to blink first. The market’s patience may be tested if a deal is not agreed by early June, and this could have big ramifications for the oil price and the global stock market rally.

Overall, it’s been an exhilarating May from the market’s perspective, however, risks are on the horizon as we move into June.