Oil Drops Below $80 After US-Iran MoU; Equities Rally, Dollar Falls

The United States and Iran confirmed a memorandum of understanding to be signed by the end of this week. Oil markets reacted immediately. WTI crude briefly dipped below $80 in early Monday trading, the lowest level in three months. The move erased much of the war premium that had built up since September.

European stocks jumped more than 1% across the board. Japan's Nikkei closed 5% higher. Tech shares led the advance, building on Friday's SpaceX IPO momentum. Nasdaq futures climbed 2.1%. S&P 500 futures added 1.3%. Energy stocks fell the most. The conflict premium vanished. Airlines and shipping companies, burdened by high fuel costs, gained 2 to 3%.

Bond yields cooled alongside the oil move. The yield curve steepened as long-term yields fell more than short-term yields, traders said. The dollar lost ground against most major currencies. EUR/USD rose 0.4% to trade back above 1.1600. AUD/USD gained 0.4% to 0.7070. USD/JPY held near 160.00. Traders were watching the Bank of Japan's meeting on Thursday.

Gold surged 2.8% to $4,336, a fresh record. The weaker dollar and lower real yields supported the move. Traders said the metal could test $4,400 if the dollar continues to slide.

The simple read points to risk-on with the conflict removed. The memorandum is a framework, not a treaty. Iran's navy has not yet announced any change to navigation rules on the Strait of Hormuz. One LNG tanker crossed the strait without interference. That single crossing does not confirm a pattern. Cheniere Energy, a U.S. LNG exporter dependent on safe strait passage, carries a Moderate risk label with a 66 Alpha Score on AlphaScala's system. The score reflects unanswered questions about military-to-military coordination.

The uncertainty around the strait keeps a lid on the full risk-on trade. Shipping insurance rates remain elevated. A formal announcement from Iran on navigation rules would be needed to bring rates down to pre-conflict levels, traders said.

The oil price drop directly relieves input costs for Japan and other major importers. The Bank of Japan decision on Thursday is the next event for USD/JPY. Traders said the MoU removed a risk premium built into oil and shipping stocks. Tech shares continued their post-SpaceX rally.

The risk premium of a wider conflict receded, traders said. The VIX and other fear gauges fell. Lower oil prices also ease inflation pressure, giving central banks more room to cut rates. Commodity currencies like the Australian and Canadian dollars rose, benefiting from the risk-on mood.

The Indian rupee gained against the dollar, extending its rally from last week. The currency benefits directly from lower oil import costs.

The next catalyst is Iran's formal announcement on Hormuz navigation. Until then, WTI crude is expected to test support near $80, traders said.