Trump's “completely unacceptable” order hopes dashed! Global markets withstand oil price pressure, Walsh confirmed as Federal Reserve Chair today

After the United States and Iran failed to reach an agreement to end the war in the Middle East, global stock markets on Monday (May 11) still withstood the pressure from rising oil prices and higher bond yields.

The MSCI World Index remained largely unchanged during the session. The European Stoxx 600 Index saw choppy trading, while S&P 500 futures hovered just below record highs.

Earlier in Asian markets, after U.S. semiconductors surged over 5% last Friday, tech stocks led the rally in Asian equities. South Korea’s KOSPI Index rose by 4.3%, hitting a new record high for the fifth consecutive time.

Oil prices rebound

With the Strait of Hormuz still closed, Brent crude climbed over 2%, rising above $103 per barrel. Previously, the market was optimistic that the U.S. and Iran might facilitate the reopening of this critical waterway, but these hopes were dashed after U.S. President Donald Trump called Tehran’s latest proposal “totally unacceptable.” According to Iranian media, Iran’s plan submitted to the U.S. emphasized the need to end all wars, lift sanctions on Tehran, demand war reparations, and recognize Iran’s control over the Strait of Hormuz.

Analysts at ING Group said: “Logically, the market should start getting fatigued by the barrage of news and repeated back-and-forth. However, oil prices remain highly sensitive to headlines related to Iran, underlining the importance of the ongoing supply disruptions in the Persian Gulf.”

Bruce Kasman, Global Head of Economic Research at J.P. Morgan, said: “The Middle East conflict is now in its eleventh week. Energy prices have already risen dramatically, but for now, they are at levels that represent economic headwinds rather than something strong enough to end the expansion.”

He also noted: “With each additional week that the Strait of Hormuz remains closed, the risk of further sharp price swings increases. According to our commodities team, operational pressures may begin to emerge at some point in June.”

Oil prices move in tandem with equities

In the past two weeks, the correlation between oil prices and equities turned positive, meaning the two are now more likely to move together, rather than in opposite directions. This is a departure from most of the previous market dynamics since the war began, when rising oil prices typically weighed on equity performance.

For now, investors seem able to ignore the pressure from rising energy prices, mainly because enthusiasm for technology-related assets remains high, while macro data is still holding up. Last week’s robust U.S. non-farm payrolls report indicated the global economy has yet to show clear signs of stalling.

IG’s Chief Market Strategist Chris Beauchamp said: “Markets are very good at absorbing this news and learning to coexist with events we once thought impossible. The crude oil market is in just such a phase right now. But if oil prices were to rise another 50%, that would pose another challenge we would have to deal with.”

He added: “If you look at corporate earnings data, performance is indeed very good. If it weren’t for the Iran situation, we could be firing on all cylinders, even stronger than now. But people are willing to believe that, no matter how difficult the process, an agreement with Iran will eventually be reached in some way.”

Despite the ongoing war, strong corporate earnings and the artificial intelligence boom have fueled significant gains in technology stocks, pushing global equity markets to record highs. Investors will pay attention to Trump’s visit to China and his meeting with Chinese leaders later this week, looking for any potential impact on the Middle East conflict.

J.P. Morgan Private Bank Global Head of Investment Strategy Grace Peters said in a Bloomberg TV interview that the record highs in equity markets are “justified.” She pointed out: “The core driver behind this is increased capital expenditures. This is not just about building AI, but also about government-directed capital flows and companies following suit.”

Bonds broadly decline

Global bond yields broadly rose. The ongoing U.S.-Iran standoff heightened concerns about oil price-driven inflation shocks and reinforced expectations that major central banks may tighten monetary policy. The U.S. 10-year Treasury yield rose 3 basis points to 4.39%.

UK gilts underperformed. Previously, UK Labour suffered a major setback in last week’s local elections, and Prime Minister Keir Starmer is struggling to maintain his position. Traders on prediction market Polymarket increased their bets that Starmer would be forced to step down, assigning a 65% probability that he will leave office by December 31.

The UK 10-year gilt yield rose 4 basis points to 4.96%. The pound fell 0.2% against the dollar.

Jefferies strategist Mohit Kumar wrote: “Our base case now is an orderly transition, with Starmer setting a timeline for someone else to take over before the next election. We remain bearish on UK long-end bonds and the pound, and maintain this view.”

The dollar rose 0.1%, the dollar gained 0.2% against the yen to 156.9 yen; the euro fell 0.1% against the dollar to $1.1778; the sterling fell 0.16% against the dollar to $1.3613. Previously, the ruling Labour Party suffered a heavy defeat in the local elections, and PM Keir Starmer continues to face mounting pressure.

Inflation data in focus

Meanwhile, traders face a busy week. The U.S. Senate is expected to confirm Kevin Warsh as the next Federal Reserve chair later today. Later this week, Trump will travel to Beijing.

Investors are also focusing on Tuesday’s April inflation report to assess how long the Fed under Kevin Warsh can keep rates unchanged. According to the median estimate of economists surveyed by Bloomberg, the U.S. Consumer Price Index for April is expected to rise 0.6% month-on-month. Previously, March CPI recorded the largest monthly increase since 2022.

Since the outbreak of the Middle East conflict in late February, traders have not only priced out the prospect of rate cuts by the Fed, but have started to bet that Warsh may need to raise rates next year. Warsh was nominated by Trump to succeed Jerome Powell as Fed chair, with Powell’s term ending this week.

Nuveen’s Head of Global Investment Strategy and Macro Credit Laura Cooper said: “The market melt-up, driven by strong earnings, AI momentum, and hopes that the energy shock will be short-lived, faces a sterner test in the coming week. If U.S. inflation surprises to the upside, yields could be pushed even higher; while weaker retail sales might begin to indicate that rising gasoline prices are starting to hit consumers.”

Gold fell below $4,700, and despite safe-haven demand and inflation risks, gold has not found obvious support. Soojin Kim at Mitsubishi UFJ Financial Group said: “The market is increasingly expecting rates to stay higher for longer to deal with inflation risks from high energy prices, and that’s not helpful for non-yielding gold.” She added: “Strong U.S. labor market data continues to support expectations that the Fed will keep rates high for longer.”