The ongoing retreat in oil prices may open up new upside potential for global equity markets.
JPMorgan Chase Asset Management's EMEA Chief Market Strategist Karen Ward stated that as the U.S.-Iran agreement improves crude supply prospects, the persistent decline in oil prices is expected to reignite the market rotation previously interrupted by the Iran situation, providing a "significant tailwind" for stocks. Ward anticipates that oil prices could further decline to $70 per barrel in the coming weeks, citing the potential for increased global crude supply following the implementation of the agreement.
According to reports, Pakistan's Prime Minister Shehbaz Sharif stated on the 15th that, following intensive negotiations, the United States and Iran have reached a peace agreement. Subsequently, both the U.S. and Iran confirmed the news. A formal signing ceremony is scheduled for June 19 in Switzerland. Influenced by this development, Brent crude fell over 5% on Monday, dropping below $83 per barrel.
Currently, expectations for lower oil prices have swiftly transmitted to financial markets, with both stocks and bonds rising concurrently, and market expectations for central bank interest rate cuts subsequently heating up—despite the European Central Bank having just raised rates by 25 basis points last week due to inflation pressures. Ward noted that the cross-sector and cross-region market rotation previously interrupted by the Iran situation is restarting.
Shifting Market Expectations: From Supply-Driven to Asset Rotation
Ward believes the driving forces behind this round of oil price declines extend beyond the Iran situation. She pointed out that cohesion within OPEC is gradually weakening, and Gulf countries may be inclined to accelerate the monetization of their reserves at current price levels, further expanding global crude supply.
However, the market is not entirely optimistic. Reports indicate that some traders and analysts maintain a cautious stance, citing unclear details of the agreement and the practical obstacles that remain for the shipping industry to resume transit through the Strait of Hormuz.
Ward stated, "The entire rotation we saw last year—whether across sectors or regions—came to an abrupt halt on February 27th. Some believed the market had fully priced in the impact of the Iran conflict, but that was not the case; the market narrative had completely changed. And now, this is all reversing; rotation and the broadening of market breadth are returning."
The dampening effect of lower oil prices on inflation could prompt major central banks to reassess their interest rate paths. Ward noted that if oil prices continue to trend lower, it would create room for central banks to cut rates, thereby providing additional support for stock valuations.
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