Iran's Tehran Stock Exchange main index broke through 5mn points for the first time in the final week of the Iranian month Khordad (third week in June), capping one of the strongest rallies in the market's history.

The surge points to a sharp shift in sentiment as expectations of a deal between Iran and the United States drew capital out of gold and fixed-income funds and into equities, with investors betting that eased banking and trade restrictions would lift the profitability of large listed companies.

The week opened with heavy demand, the index rising more than 100,000 points to clear 4.7mn as more than IRR600tn of retail money entered the market. Banking, automotive, metals and petrochemical stocks drew the most interest, sectors seen as the main beneficiaries of any improvement in foreign relations.

The index added more than 120,000 points the following session to enter the 4.8mn channel, with the equal-weighted index also rising, a sign the gains extended beyond a few large stocks to small and mid-cap companies.

June 15 marked the peak of the rally, the index jumping more than 160,000 points towards the 5mn threshold as retail inflows hit a record of around IRR90tn in a single day. Some capital was seen leaving gold funds, indicating investors had factored a lower probability of political risk into their decisions.

The index then crossed 5mn points for the first time, rising more than 120,000 points to around 5.1mn, though some investors began taking profits and the pace of inflows eased.

On the week's final session the market moved into a more balanced phase, the index settling at a historic 5.151mn after a gain of about 50,000 points, with only around half of stocks trading higher. Retail trading value reached more than IRR360tn and volume stood at around 89bn shares.

Economist and capital market analyst Peyman Molavi said one of the main drivers of the rally was the reduced risk of war and political tension. Professional investors had moved in while weighing macroeconomic indicators, including high liquidity growth, a rising monetary base and high inflation, he said.

Liquidity growth above 44%, monetary base growth above 55%, and point-to-point inflation above 80% indicated that prices in Iran's economy were under upward pressure, prompting professional investors to allocate part of their holdings to equities, Molavi said.

Despite the week's records, the market remained well below the records set up to 2020 in real terms, Molavi said, indicating room for further growth.

He cautioned that the capital market was specialised and carried risk, and that many investors still held part of their assets in gold, foreign currency or property, entering equities gradually.

If political agreements improved economic growth and brought capital into the economy, the market could extend its rally, while political or economic shocks could change its course, Molavi said.

The rally tracked a sharp recovery in the rial, which strengthened from around IRR1,780,000 (June 11) per US dollar to about IRR1,556,000 (June 19) on the open market over the week following the deal, a gain of roughly 13%.