Westpac Morning Report - FJElite

Risk sentiment improved after President Trump called off planned attacks on Iran to allow more time for peace talks.

He also said an outline agreement had been reached, which included the reopening of the Strait of Hormuz. Iran said talks with Oman on a mechanism for ships to transit the waterway were in their final stages. Against this backdrop, oil prices fell sharply, with WTI crude down 5.1% to US$80.34/bbI.

US equity markets rallied strongly as geopolitical tensions eased and oil prices declined. The S&P 500 rose 1.5% to 7.601. The Dow Jones Industrial Average gained 1.3% to a record high, while the tech-heavy Nasdaq advanced 2.1%. Volatility also eased, with the VIX Index falling 0.8 points to 15.86.

European equities were generally firmer. The Euro Stoxx 50 gained 1.1%. while the DAX rose almost 1.5%. The FTSE 100 was broadly unchanged. Asian markets were mixed, with the Hang Seng up 0.5% and the Nikkei down 0.9%. Locally, the S&P/ASX 200 rose 0.5% to 9.019. SPI futures were broadly unchanged at 8,970. pointing to a flat open for the domestic market.

Bond markets rallied as lower energy prices helped ease inflation concerns. In the US. the 2-year Treasury yield fell 5bps to 4.24%. while the 10-year Treasury yield declined 6bps to 4.68%. Traders are now pricing around 50bps of rate cuts by September 2027, with 25bps expected by the end of 2026. European yields also moved lower, with German 10- year Bund yields down 5bps to 3.15% and UK 10-year gilt yields down 10bps to 4.95%. In contrast, Japanese 10-year government bond yields rose 3bps to 2.84%.

Australian bond markets were little changed in cash trading, with the 3-year government bond yield holding at 4.50% and the 10-year yield steady at 4.93%. Futures yields edged lower, with the 3-year contract down lbp to 4.51% and the 10-year contract down 2bps to 4.98%. OIS pricing suggests a terminal cash rate of around 4.50% this year, with markets pricing in around half a rate rise by December.