The announcement of a peace agreement between the United States and Iran triggered a market surge on Monday, with international oil prices plunging while risk assets and US Treasury prices climbed.

The energy market saw the most pronounced reaction. The price for WTI crude oil futures for July delivery fell 5.04% to $80.60 per barrel, while Brent crude for August delivery dropped 4.23% to $83.64 per barrel.

Asian stock markets posted significant gains. South Korea's KOSPI index and Japan's Nikkei 225 both rose over 5%, and Australia's S&P/ASX 200 index advanced 1.3%.

US and European equity index futures also rose in unison. Dow Jones futures were up 0.82%, S&P 500 futures gained 1.07%, and Nasdaq futures climbed 1.80%. Euro Stoxx 50 futures increased by 1.6%.

The drop in oil prices and the prospect of peace also impacted other asset classes. The US Dollar Index fell 0.32% to 99.483, while the benchmark 10-year US Treasury yield declined by 5 basis points to 4.42%, indicating investor relief over inflation concerns as energy prices retreated.

Initial Market Response and Analyst Views

The most immediate market effect of the deal has been a repricing of the inflation risk premium that had been in place since the Strait of Hormuz was closed. The sharpest moves were in oil, but a more telling signal came from the bond market, where falling yields alongside rising stock prices suggest the market views the energy shock as temporary rather than structural.

Shifting Expectations for Interest Rates

Following the news of the US-Iran accord, investors scaled back expectations for Federal Reserve interest rate hikes, leading to a broad rally in US Treasuries.

Yields fell across the curve, with the steepest declines in short-term bonds due to their heightened sensitivity to monetary policy shifts. Swap traders now see roughly a 60% chance of a 25-basis-point Fed rate hike by year-end, down from about 80% last Friday.

The rise in Treasury prices reflects market optimism that resolving the Iran conflict will help reopen the Strait of Hormuz and lower oil prices. Given that US Treasuries serve as a global benchmark for borrowing costs, the implications extend far beyond the $31 trillion US bond market, affecting everything from corporate debt to emerging market assets.

With oil price pressures easing, central banks can now afford to adopt a more patient, wait-and-see approach regarding short-term inflation dynamics.

In the wake of the announcement, the US 2-year Treasury yield fell 5 basis points to 4.03%, the benchmark 10-year yield also dropped 5 basis points to 4.42%, and the 30-year yield declined 5 basis points to 4.92%, marking its lowest level since May 7th.

The US and Iran announced an agreement to reopen the Strait of Hormuz, a transit route for about one-fifth of global oil supply. This development is positive news for the US, where inflation has been accelerating at its fastest pace in three years, shifting market focus to new Fed Chair Kevin Warsh and the central bank's future policy direction.

The Federal Reserve is scheduled to announce its latest interest rate decision on Wednesday. Economists widely expect the Fed to hold its benchmark rate steady in the 3.5%–3.75% range while it assesses how the energy price shock from the Iran war will impact the economy.

Persistent Market Caution

However, US bond investors cannot afford to be completely complacent. Within minutes of the deal's announcement, differing interpretations from the US and Iran emerged, signaling that reaching consensus on lingering issues like Iran's nuclear program remains challenging.

The Strait of Hormuz is expected to formally reopen on Friday, meaning there could be an anxious waiting period until then. Israel's actions during this interim period also present a significant uncertainty.

Safe-Haven Demand and Lingering Doubts

Beyond US Treasuries, gold prices also rose. Gold presents an interesting exception; in a pure risk-on trade, its price should fall as geopolitical premiums fade, yet it has held around $4,300 per ounce, suggesting the market has not fully bought into the deal's durability.

Spot gold prices increased nearly 2% to $4,302.19 per ounce.

Uncertainty persists as the US-Iran agreement has not yet been signed, and risks remain in its implementation. The deal is not set to be signed until June 19th, details remain sparse, and the conflict has shown more than once that headlines can change in an instant.

Analysts also emphasize that the oil outlook hinges on the speed at which shipping and production return to normal. Assuming the Strait remains open and exports recover, Brent crude could fall to around $80 per barrel by year-end. However, warnings note that damaged refining infrastructure, the presence of sea mines, and uncertainty around tanker movements could delay a return to normal operations.

Nevertheless, the market may take comfort from the prospect that a return of oil supply to 60-70% of pre-war levels could potentially reintroduce expectations of a global supply glut.

For investors, the most significant impact may be from lower energy prices on inflation and central bank policy. Falling oil prices ease pressure on households and businesses while reducing the risk of a broad-based inflation resurgence. For global investors, the overall picture is positive, as sustained declines in oil prices would alleviate pressure on central banks.