World markets rocket higher on optimism Iran war could end soon

Stocks soared, bonds rallied and the dollar languished on Wednesday, as hopes of a de-escalation of the Iran conflict fuelled the biggest rebound in regional equities in more than three years. S&P 500 e-mini futures are pointing to gains of about 0.8%, which would extend a 2.9% rally on Tuesday that was its biggest daily jump in nearly a year. In Europe the STOXX 600 jumped 2.4% and is also now heading for its largest one-day jump in a year - as travel stocks surged 3.3% and aerospace and defence stocks added 4.9%. German bund yields slipped 5 basis points. Earlier, MSCI's broadest index of Asia-Pacific shares outside Japan rose 4.7% - its biggest one-day increase since November 2022. On Tuesday, U.S. President Donald Trump said the U.S. could end its military attacks on Iran in two to three weeks. "Markets are trading this narrative that the war could be over, or at least that the U.S. could withdraw. That is creating this positive sentiment in risk assets," said Evelyne Gomez-Liechti, multi-asset strategist at Mizuho, though she added she is more inclined to be sceptical about the rally. "We still have strikes going on. Israel hasn't really been talking about a ceasefire yet and they are also a very important mix of the equation," she said. "Iran doesn't seem like it is willing to negotiate in any case." IRAN WAR DEVELOPMENTS But the aggressive re-pricing that happened when the war started means it is hard to stand against momentum when the narrative is positive, said Gomez-Liechti. The rally shrugged off a report in the Wall Street Journal that the UAE may enter the conflict and is lobbying for a U.N. Security Council resolution to authorise it to take part in military action to force open the Strait of Hormuz. U.S. Secretary of State Marco Rubio said Washington will have to reexamine its relations with NATO after the war ends. Michael Brown, senior research strategist at Pepperstone, said the market is trading "on the idea of hope rather than expectation." "The market is ignoring some very important unanswered questions, particularly around ... if the U.S. were to pull out ... what does that mean regarding the Strait of Hormuz? What does that mean regarding Iran's capability going forward? What does that mean in terms of the inflationary impulse and growth headwinds that are still coming?" he said. Trump will provide an update on Iran in an address to the nation at 9 p.m. ET on Wednesday (0100 GMT on Thursday), White House spokeswoman Karoline Leavitt said on X. Stocks on Wall Street soared on Tuesday as traders bet on the potential off-ramp to the war, sending the S&P 500 2.9% higher, while oil markets followed through on earlier declines in Asian trading. Brent crude futures pared some losses and were last 1.1% lower at $102.89 a barrel, having earlier moved below the $100 mark in volatile trading. Gold was 1.6% higher at $4,742.34 per ounce. "It's almost the precise opposite of the playbook that we had been operating with for the entire conflict, which is you expect crude to grind higher, you buy the dollar as a haven, and you trim your exposure to everything else. Today you're just putting that into reverse ultimately," said Pepperstone's Brown. DATA DELUGE Elsewhere, the U.S. dollar index slipped 0.3% to 99.47, extending its biggest one-day drop in two weeks on Tuesday into a second consecutive day of declines, as traders reassessed the odds that the Federal Reserve may resume easing policy earlier than thought. The yield on the U.S. 10-year Treasury bond was down 2.2 basis points at 4.289%. Fed funds futures are pricing an implied 17.9% chance that a 25-basis-point cut to interest rates could come at the Fed's two-day meeting ending on July 29, up from a 7.5% chance a day earlier, according to the CME Group's FedWatch tool. Even so, swaps pricing indicates the odds of a cut by April next year are viewed as little better than a coin toss. Traders are awaiting some key economic data releases for an insight into the state of the U.S. economy. ADP employment numbers for March are due later in the session and will serve as a precursor to Friday's more closely watched non-farm payrolls report. Meanwhile, ISM manufacturing numbers for March are due, with RBC Economics expecting an acceleration to 52.6. U.S. retail sales for February will also hit screens. On Wednesday, a PMI survey showed euro zone manufacturing growth bounced to its strongest in nearly four years in March as supply chain disruptions inflated growth figures. The International Energy Agency head Fatih Birol said on Wednesday that oil supply disruptions from the Middle East will rise in April and begin to impact Europe's economy as the closure of the Strait of Hormuz severely curbs supplies. The euro was close to a three-week high versus the dollar, up 0.25% at $1.16. In cryptocurrencies, bitcoin was up 0.5% at $68,522.81 while ether rose 1.3% to $2,133.96.