Shares rally, oil slumps as Iran-Israel ceasefire goes into effect

Brent futures had already slid 7% on Monday and U.S. shares jumped after Iran made a token retaliation against a US base and signalled it was done for now

Oil tumbled 3 per cent, global shares surged and the dollar dropped on Tuesday as US President Donald Trump announced a ceasefire between Israel and Iran, a dramatic turnaround after the US bombed Iran's nuclear sites over the weekend.

Brent futures had already slid 7per cent on Monday and US shares jumped after Iran made a token retaliation against a US base and signalled it was done for now.

With the immediate threat to the vital Strait of Hormuz shipping lane seemingly over, the global benchmark touched its lowest since June 11 and was last at $69.11 a barrel, US crude futures dropped 3.2per cent to $66.32 a barrel.

"Investors mostly shrugged at what appeared on the surface a seismic geopolitical event over the weekend and those who kept their nerve and held off from de-risking have so far been proven right," said Kenneth Broux, head of corporate research FX and rates at Societe Generale.

Israeli Defence Minister Israel Katz saying he had ordered the military to strike Tehran in response to what he said were Iranian missiles fired in a violation of the ceasefire, did little to disrupt the mood. Iran said it had not violated the ceasefire.

Risk assets rallied, with S&P 500 futures up 0.9per cent and Nasdaq futures 1.1per cent higher. Europe's Stoxx 600 gained 1.4per cent, with travel stocks including airlines surging 3.5per cent, while oil and gas names shed 2per cent.

Earlier in the day, MSCI's broadest index of Asia-Pacific shares outside Japan jumped 2.2per cent, while Japan's Nikkei rallied 1.1per cent.

But the positive news did not spill over into the bond market where the focus instead was on Germany's draft budget, which includes record investment, requiring higher borrowing.

The impact was particularly felt on longer dated bonds. Germany's 30-year yield rose 8 basis points to 3.065per cent and its 10-year yield rose 5 bps to 2.60per cent.

Those moves rippled across markets, with the US 10-year yield up 2 bps at 4.34per cent and Britain's 10-year yield up 2 bps to 4.51per cent, though increasing bets on US rate cuts this year kept US bonds in check.

RATE CUTS APPROACHING?

Investors are also keeping a close eye on remarks from Federal Reserve policymakers, who in aggregate have been nervous about giving any signs that rate cuts are imminent.

However, Vice Chair for Supervision Michelle Bowman said on Monday the time to cut interest rates was getting nearer as risks to the job market may be on the rise.

That followed Fed Governor Christopher Waller saying on Friday he would consider a rate cut at the July 29-30 meeting.

Fed Chair Jerome Powell will appear before Congress later on Tuesday and, so far, has been more cautious about a near-term easing.

Markets still only imply around a 22per cent chance the Fed will cut at its next meeting on July 30, but a September cut is near-to-fully priced.

News of the ceasefire saw the dollar extend an overnight retreat and slip 0.77per cent to 145.0 yen, having come off a six-week high of 148 yen overnight.

The euro rose 0.2per cent to $1.1602 on Tuesday, having gained 0.5per cent overnight.

The yen and euro benefited from the slide in oil prices as both the EU and Japan rely heavily on imports of oil and liquefied natural gas, while the US is a net exporter.

The risk-on mood saw gold prices ease 1.3per cent to $3,323 an ounce.