Bond traders are preparing for a US inflation report to gauge how long the Federal Reserve, under incoming Chairman Kevin Warsh, can maintain current interest rates amid Middle East tensions. The bond market has been influenced by rising oil prices due to US-Iran conflict, leading traders to speculate that Warsh might raise rates next year, with overnight-indexed swaps showing a 40% chance of a hike by April 2027.

US stocks have reached record highs as S&P 500 companies reported first-quarter earnings that surpassed expectations by the widest margin since 2013. Profits surged 27%, driven mostly by technology giants benefiting from artificial intelligence. The Magnificent Seven is expected to post a 57% increase in profits for the quarter, and the remaining S&P 500 companies are projected to see profits rise 17%.

The market's momentum-driven rally faces new headwinds after President Donald Trump's rejection of Iran's peace proposal. While last week saw global stocks and crypto surge to record highs, analysts warn that stretched valuations in high-momentum assets could foreshadow a correction. The ongoing Iran conflict and elevated oil prices are adding to investor anxiety, with traders now shifting into 'risk-off' mode as the week begins. Market participants are closely watching for signs of a reversal in recent price action amid persistent geopolitical and inflation risks.

Banks increased lending to companies in the first quarter while private credit firms saw lending volumes decline, suggesting some borrowers are shifting back toward traditional bank financing. Market participants say the change could lower funding costs for companies, as some private credit funds face reduced lending capacity following more than $15 billion in investor redemptions during the quarter. "It's a longer-term trend," said Hans Mikkelsen, US credit strategist at TD Securities. "You had a lot of regulation after the financial crisis that pushed a lot of this business into private credit. Now you're looking at many years of financial deregulation and that's going to make it easier for banks to take on some of this risk as well."

Geopolitical tensions and the oil shock tied to the Iran war emerged as the top financial stability risks in the Federal Reserve's latest Financial Stability Report. Respondents warned that sustained energy price pressures could fuel inflation, strain markets and potentially force tighter monetary policy. The Fed also flagged artificial intelligence and private credit as emerging risks, while saying private credit vulnerabilities remain manageable for now.

Federal Reserve Governor Christopher Waller has announced that the 12 regional Fed banks have agreed to a framework to centralize and standardize certain functions, such as human resources and back-office operations. The move comes as Kevin Warsh is expected to be confirmed as Fed chair next week. Waller emphasized the need for collective trust and commitment among the regional banks while maintaining their operational independence.

The Senate Banking Committee is set to vote Thursday on stablecoin legislation as lawmakers continue discussions around provisions related to yield and rewards. The bill is part of a broader push to establish a regulatory framework for digital assets in the U.S. The House passed its version of the Clarity Act in July 2025, but the Senate must approve legislation by the end of 2026 for it to reach President Donald Trump’s desk.