United States stock futures rallied on Monday night (Tuesday AEST) while oil prices plunged, as investors grew increasingly optimistic that Washington and Tehran were nearing an agreement to end the conflict between the two countries.
By 8:20 am AEST (10:20 pm GMT), Dow futures were up 0.8%, S&P 500 futures climbed 0.9%, and Nasdaq-100 futures advanced 1.3%.
U.S. markets were closed on Monday for the Memorial Day public holiday, leaving futures markets to react to developments surrounding the Middle East conflict and shifting expectations for global energy prices.
Investor sentiment improved after President Donald Trump said negotiations with Iran were “proceeding nicely”, although he cautioned that military action remained possible if diplomacy failed.
The prospect of a resolution to the conflict weighed heavily on oil prices, with Brent crude and West Texas Intermediate crude futures tumbling 9.8% and 6.4%, respectively.
Analysts at ANZ said additional developments had reinforced market confidence that a breakthrough could be approaching:
“In addition to Trump’s comments overnight, Pakistan’s military chief Asim Munir reportedly told China an agreement is “close” to being reached to extend the ceasefire and reopen the Strait of Hormuz.
"An Iranian delegation has travelled to Qatar to discuss the release of frozen funds. Not all details are finalised. Potential sticking points are whether ships will have free passage through the Strait of Hormuz or be required to pay Iran and/or Oman a toll (now recharacterised as a charge for “navigation services”) and how quickly frozen Iranian funds will be released.”
The Strait of Hormuz remains a central issue in negotiations due to its importance to global energy markets. Before the conflict escalated, the waterway carried around one-fifth of the world’s oil and liquefied natural gas shipments.
The S&P 500 rose 0.9% over the previous week, recording its longest weekly winning streak since late 2023. The Dow Jones Industrial Average climbed 2.1%, marking its third weekly advance in four weeks, while the Nasdaq Composite gained 0.5%, its seventh positive week in the past eight.
Despite the retreat in energy prices, investors remain cautious on the outlook for U.S. monetary policy, with inflation concerns continuing to cloud expectations for Federal Reserve rate cuts.
According to CME Group’s FedWatch Tool, traders are now pricing in an 8.5% probability of a Federal Reserve interest rate hike in July, sharply higher than the 0.9% chance implied a month ago.
The shift reflects growing uncertainty over the Federal Reserve’s next move as policymakers balance moderating economic growth against lingering inflation risks tied to commodity prices and geopolitical instability.
