Investors are celebrating the Iran-Israel cease-fire. Here's why they shouldn't breathe easy just yet.
The S&P 500 closed nearly 1% higher on Monday, and futures trading on Tuesday point to a similar gain that could see it hit a new high.
The surge follows Iran firing missiles at a US military base in Qatar, and President Donald Trump declaring an end to the 12-day clash between Israel and Iran.
Tehran effectively warned Qatar and the US that the missiles were coming, suggesting the launch was a largely symbolic retaliation to save face after the US bombed its nuclear facilities on Sunday.
"Iran's telegraphed retaliation against the US had already been taken as a sign that de-escalation was the most likely path forward, which had helped lift US stocks, and the rally has extended," Matt Britzman, a senior equity analyst at Hargreaves Lansdown, said in a morning note.
The Euro Stoxx 50 and Hong Kong's Hang Seng index both gained about 2% on Tuesday, as the world breathed a sigh of relief after fearing a major escalation and prolonged conflict in the region. The risk-on mood lifted bitcoin, which had dropped below $98,500 on Sunday, to near-record highs above $105,000.
Brent crude, after soaring to $80 early Monday, has plunged by about 14% to below $70 as traders pared their bets on Iran closing the Strait of Hormuz and disrupting global oil flows.
Treasurys dip
A prolonged spike in oil prices could fuel inflation and crimp economic growth, putting central banks in a bind. Raising interest rates could temper price growth but dampen growth further; cutting them could boost their economies but worsen inflation.
Slimmer chances of an oil shock and renewed hopes for rate cuts have pushed down 2-year and 10-year US Treasury yields, which tend to track rate expectations, to their lowest levels since early May.
The dollar, which jumped on Monday as investors banked on the greenback as a haven asset and priced in higher interest rates, ended the day lower as geopolitical headwinds faded. Gold, another popular assets during flights to safety, has also dipped.
What does all that mean? It suggests investors are broadly shrugging off concerns of the Iran-Israel conflict engulfing other countries in the Middle East and roping in the US and other major players.
They may be jumping the gun in assuming the threat has passed.
'Geopolitical powder keg'
"This truce is fragile," Nigel Green, the CEO of deVere Group, said in a morning note. "It's politically brokered and militarily uneasy. One wrong move and tensions could flare again, dragging markets down with them."
Green said the deeper issue is the instability of a region that plays a critical role in global energy, security, and trade: "The Middle East remains a geopolitical powder keg, and history tells us that calm doesn't last."
Peace may hold for now, but the US dropping bombs on Iran means the conflict has firmly joined Trump's tariffs on the "laundry list" of risks to the US economy, Ryan Sweet, chief US economist at Oxford Economics, told Business Insider ahead of the cease-fire.
"I am worried. As an economist, I worry about everything."
He underscored how foreign wars can affect the "collective psyche," with concern of higher gas prices in the future leading American consumers to save more by putting off big purchases and cutting back on non-essentials such as dining out. Those behaviors can have knock-on effects on economic growth and employment.
Markets are signaling the US is in the clear, but the world can be much messier and unpredictable than investors might like.
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