(March 25): Oil declined and equities rallied as optimism strengthened around Washington’s diplomatic push to resolve the nearly month-long Middle East conflict.
Brent crude fell 5.1% to US$99.12 a barrel, while a gauge of Asian equities climbed 1.6% on expectations that a de-escalation of the Iran war would ease inflation pressures and reduce the need for monetary tightening. A Bloomberg gauge of the dollar fell 0.1%, while bonds in Australia and New Zealand rose along with Treasuries.
Equity-index futures for the S&P 500 advanced 0.5%, helped by reports of diplomatic efforts. The US has drafted a 15-point plan intended to help bring the war with Iran to a close, according to people familiar with the matter. Earlier, Israel’s Channel 12 reported that Washington was seeking a one-month ceasefire.
Attention stayed fixed on the Strait of Hormuz, a vital artery for Middle East crude flows, that remains effectively closed for ships.
“Crude remains the tip of the spear in this headline-driven market,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth Group. “Reports that a potential 30-day ceasefire may be in the works are easing worst-case pricing scenarios and concerns around demand destruction. Signs there may be an off-ramp are reducing some of the risk premium in the market.”
See also: Stocks pare gains, oil edges up with Iran in focus
Financial markets have whipsawed since the conflict erupted in late February, with headline-driven swings leaving traders “stopped out” of positions. Sharp volatility in crude is further clouding risk assessment, as surging commodities heighten inflation concerns and raise the prospect that policymakers may keep borrowing costs elevated or even tighten further.
The US plans highlight the intensifying urgency within the Trump administration to resolve the conflict as the economic toll mounts.
President Donald Trump has been pushing talks with Iran in a bid to halt the fighting, yet those efforts have been clouded by uncertainty over the structure of negotiations, the Iranian participants and how any deal would be structured.
See also: Stocks rise, oil sinks as Trump eases Iran threats
The details of the 15-point proposal remain unclear, though Trump has publicly mused that any agreement would have to include a prohibition on Iran ever obtaining a nuclear weapon or enriching radioactive material for civilian purposes.
Investors such as Qian Su, head of investment management for Asia at Indosuez Wealth Management, said it’s hard to take Trump at his word.
“We’re defensive, we’re not chasing headlines, we’re waiting for more prominent signs of real resolution on the ground before buying in at a better timing,” she said.
In other corners of the market, gold rose for a second day to trade around US$4,600 an ounce and bitcoin advanced to about US$71,000.
Attention was also on the bond markets with Federal Reserve officials Michael Barr and Austan Goolsbee signalling that inflation continues to be a key concern for policymakers. The drop in crude oil prices, however, eased worries about prices and dampened the case for the Fed to pivot to a rate-hike.
Yields on the policy-sensitive two-year Treasuries fell one basis point to 3.87%.
“It’s hard to take a firm signal from these headlines,” said Oliver Levingston, G10 FX and rates strategist at BofA. “Investors who believe there will be an eventual partial reversal in the oil price spike should be long rates, especially in reals & intermediate tenor.”
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Even as reports suggested a possible de-escalation, the conflict continued to rage. Kuwaiti authorities said on Wednesday they were dealing with a fire after drones targeted a fuel tank at the airport, according to the country’s aviation regulator. Israel said it carried out a wave of strikes at targets across Tehran.
Also, the Trump administration ordered the 82nd Airborne Division to deploy about 2,000 soldiers to the region, according to a person familiar with the matter, as the White House weighed options to ease Iran’s hold on the Strait of Hormuz, the vital waterway that’s a focus of the conflict.
Meanwhile, Iran started charging transit fees on some commercial vessels passing through the Strait of Hormuz, people familiar with the matter said, the latest sign of its control over the most important maritime energy route. Yet Tehran said non-hostile foreign ships are allowed to cross the waterway on its terms.
“It all comes down to the re-opening of the Strait of Hormuz,” said Matt Maley at Miller Tabak. “So, if we hear that ‘good progress is being made’ in the negotiations at the end of this week, it won’t be enough, if the Strait remains very restricted.”
Aside from the geopolitical risks, Maley also noted that the issues facing the private-credit market are not receding, so brushing these problems aside “is not a good idea”,
Two of the biggest names in private credit, Ares Management Corp and Apollo Global Management Inc, blocked investors from getting even half of the money they wanted out of their funds, a sign of mounting strain in the US$1.8 trillion ($2.30 trillion) market.
Any optimism about the war in the Middle East ending without the US first making an attempt to secure and control the Strait of Hormuz, or without first getting more leverage in talks with Iran, still seems misplaced, according to Thierry Wizman at Macquarie Group.
“The longer oil prices stay high, the longer central banks will feel obligated to sound as if they will tighten policy,” he said.
Corporate news:
- SpaceX aims to file a prospectus for an initial public offering as soon as this week, the Information reported, kicking off one of the year’s most-anticipated market debuts.
- SK Hynix Inc seeks to list in the US this year, a move that would help it keep pace with artificial intelligence’s voracious demand for memory.
- Merck & Co is in advanced talks to buy drugmaker Terns Pharmaceuticals Inc, according to people familiar with the matter.
Some of the main moves in markets:
Stocks
- S&P 500 futures rose 0.5% as of 12.18pm Tokyo time
- Japan’s Topix rose 2.4%
- Australia’s S&P/ASX 200 rose 1.8%
- Hong Kong’s Hang Seng rose 0.3%
- The Shanghai Composite rose 0.9%
- Euro Stoxx 50 futures rose 0.9%
Currencies
- The Bloomberg Dollar Spot Index fell 0.1%
- The euro was little changed at US$1.1605
- The Japanese yen was little changed at 158.79 per dollar
- The offshore yuan was little changed at 6.8941 per dollar
Cryptocurrencies
- Bitcoin rose 0.6% to US$70,450.23
- Ether was little changed at US$2,150.13
Bonds
- The yield on 10-year Treasuries declined one basis point to 4.35%
- Japan’s 10-year yield declined 1.5 basis points to 2.250%
- Australia’s 10-year yield declined nine basis points to 4.96%
Commodities
- West Texas Intermediate crude fell 4.3% to US$88.39 a barrel
- Spot gold rose 2.3% to US$4,577.37 an ounce
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