Oil prices surge over 2% as new US strikes in Iran temper hopes for a peace deal, while stocks and currencies experience mixed results amid ongoing geopolitical tensions and concerns over inflation.
Oil prices rose on Tuesday, with Brent futures increasing by more than 2% to $98.21 a barrel, as new US strikes in southern Iran dampened investor optimism over an imminent US-Iran peace deal. The US forces conducted the strikes as a defensive action, while Tehran's top negotiator and foreign minister were in Doha for talks with Qatar's prime minister on a potential deal with Washington to end the three-month-old war.
The developments have raised concerns among investors, with Joseph Capurso, a strategist at Commonwealth Bank of Australia, expressing skepticism about the prospects of a deal. "I'm a bit skeptical... We keep being told there's a deal that's near, but what does the deal look like? That's what's really important. When's the Strait of Hormuz going to open... There's a lot we don't know," he said. US Secretary of State Marco Rubio also negotiating a deal with Iran could "take a few days", quashing hopes of an imminent end to the conflict.
The mixed signals from the US and Iran have resulted in a volatile market, with stock markets experiencing mixed results. MSCI's broadest index of Asia-Pacific shares outside Japan advanced 0.67%, while Japan's Nikkei shed 0.14%. Nasdaq futures trimmed earlier gains to trade 0.86% higher, while S&P 500 futures rose 0.66%. The EUROSTOXX 50 futures eased 0.16%, while FTSE futures added 0.2% and DAX futures lost 0.26%.
The ongoing war between the US and Iran has significant implications for the global economy, with Capurso noting that "the market wants to believe that it's all going to end soon, because the war not ending is quite bad for the world economy. The world economy's had these buffers of running down inventories, but you can't keep running down inventories." The conflict has also led to a surge in oil prices, which could stoke inflation and prompt rate hikes across developed and emerging markets.
In currencies, the dollar steadied on Tuesday on renewed safe-haven demand, though it remained some distance away from a six-week peak hit last week. The euro fell 0.1% to $1.1633, while the sterling eased 0.13% to $1.3488. Against the yen, the dollar was flat at 158.94. Bonds were largely steady after a rout last week on worries that higher energy prices for longer would stoke a resurgence in inflation and prompt rate hikes.
The yield on the two-year US Treasury note fell nearly 7 basis points to 4.0573%, while the 10-year yield fell more than 6 bps to 4.5083%. Eric Robertsen, Standard Chartered's head of global research and chief strategist, "we are likely to see periodic yield retracements on occasions when geopolitical risks subside, but inflation and fiscal risks are likely to be more sustained." He "commodity supply dislocations will take months to resolve, and fiscal support measures are likely to drive a sustained deterioration in sovereign balance sheets - which will also require increased borrowing in an environment of higher funding costs."
As the situation continues to unfold, investors are closely watching the developments in the Middle East and their impact on the global economy. The surge in oil prices and the mixed results in the stock market have raised concerns about the prospects of a peace deal and the potential consequences for the world economy. With the US and Iran engaged in talks, the outcome of the negotiations will be crucial in determining the direction of the global markets in the coming days.
