Odds of Fed Rate Hike This Year Drop to 30% From 70% as Global Stocks, Bonds Rally

"It will take time for the energy-price shock to fully dissipate"

Odds of a U.S. rate hike this year fall to 30% from 70% a week earlier

International oil prices tumbled on June 15 and stocks rose worldwide on hopes that the U.S. and Iran had reached a peace agreement that would reopen the Strait of Hormuz.

Markets that had assigned a 70% chance to a U.S. rate increase this year a week earlier cut those odds to 30% on the day. Bond prices rose, sending yields lower. Gold and silver rebounded, while the dollar weakened. Even so, traders expect it will take time for the shock from higher energy prices to fully fade.

Asian and European equities advanced broadly, led by energy-importing markets such as South Korea, Japan and China.

South Korea's Kospi jumped 5.2% to 8,545.98. Japan's Nikkei 225 rose 4.99%, closing after touching a record intraday high. Taiwan's Taiex gained 2.36%, Hong Kong's Hang Seng Index added 0.56%, and mainland China's CSI 300 climbed 2.39%. India's Nifty 50 also traded higher.

Hopes for resumed oil shipments through the Strait of Hormuz after a U.S.-Iran peace agreement drove crude down nearly 5%. That in turn fueled expectations that global inflation pressures would ease, reducing the need for further rate increases.

Brent futures, the international benchmark, traded at $82.95 a barrel as of 9:45 a.m. GMT, down 5% on the day. U.S. West Texas Intermediate fell 5.4% to $80.20 a barrel, nearing a return to the $70 range.

The Stoxx Europe 600 Index rose more than 1%, approaching a record high.

U.S. stock-index futures also rallied. Around 5 a.m. EST, S&P 500 and Dow Jones Industrial Average futures were each up more than 1%, while Nasdaq futures climbed more than 2%.

As the odds of a rate hike fell sharply, Treasuries gained. The two-year yield dropped 6 basis points to 4.02%, while the 10-year yield fell 5 basis points to 4.440%.

The developments may offer relief to central banks heading into policy meetings this week. Lower oil prices could ease pressure to tighten monetary policy to contain inflation stemming from higher energy costs.

Vivek Dhar, a mining and energy analyst at CBA, said Brent futures could fall to $80 a barrel by year-end, assuming the strait is not closed again.

Central banks in the U.S., Japan, the U.K., Australia, Switzerland, Sweden, Norway and Russia are due to hold rate-setting meetings this week. Reduced pressure for additional monetary tightening ahead of those meetings is a positive for markets.

The Federal Reserve is expected to keep its benchmark rate unchanged at 3.50% to 3.75% at this Federal Open Market Committee meeting, the first under Chair Kevin Warsh. Investors are watching whether the Fed will abandon its easing bias in its statement, economic projections and press conference, particularly in relation to inflation risks.

Markets have scaled back expectations for a Fed rate increase this year. The odds of one hike by year-end had climbed as high as 70% a week earlier, but had fallen to about 30% for early October as of June 15, according to CME FedWatch.

Japan, where inflation had already been intensifying before the Middle East war, is viewed as having a high chance of raising interest rates at this meeting.

The dollar weakened broadly as yields fell and risk appetite improved. The euro rose 0.4% to $1.1617, while the pound gained 0.3% to $1.3446.

The dollar held just above 160 yen. Even so, the yen remained under pressure despite expectations that the Bank of Japan will raise rates by 25 basis points to 1% on Tuesday.

The Bank of England is expected to keep its benchmark rate at 3.75% on June 18 and hold it there through 2026.

Earlier in the day, Pakistani Prime Minister Shehbaz Sharif wrote on social media that the U.S. and Iran had reached a peace agreement. President Donald Trump confirmed the agreement and said it included reopening the Strait of Hormuz.

Iran, however, said vessel traffic through the strait would be controlled by Iran and Oman. That suggested ships could face a type of transit fee.

Even so, Wall Street viewed the peace agreement as a major positive for a stock market already buoyed by enthusiasm over SpaceX's record $75 billion initial public offering.

Gold rose 2.6% to $4,325 an ounce. Silver climbed more than 4%, while Bitcoin gained 2.5% to $65,633.

Kim Jung-a, guest reporter, Hankyung.com, kja@hankyung.com