Concerns over escalating hostilities in the Middle East stayed front and centre in markets on Wednesday, sending oil prices higher and leaving investors hesitant to scoop up risk assets.
Investors have grown increasingly nervous over the possibility of more direct US military involvement as the Israel-Iran air war entered a sixth day, with US president Donald Trump calling for Iran’s unconditional surrender and warning US patience was wearing thin.
“Clearly the Middle East issues have not been solved, and comments by president Trump just mean that things could get more dangerous in that part of the world,” said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia (CBA).
“The markets are trying to figure out that risk of a big US military intervention. It’s hard to say exactly what the market is thinking, but judging by the oil price and currencies, they’re certainly pricing in at least some risk that something goes very bad there.”
Oil prices extended their climb on Wednesday, with Brent crude futures up 0.3 per cent to $76.67 per barrel while US crude rose 0.43 per cent to $75.16 a barrel. Both had jumped more than 4 per cent in the previous session.
While the broad risk-off moves across markets from earlier in the week abated slightly, the overall mood remained downbeat.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.3 per cent as did Eurostoxx 50 futures, which declined 0.34 per cent.
Dax futures similarly slid 0.54 per cent, while Ftse futures edged 0.06 per cent higher.
S&P 500 futures added 0.12 per cent while Nasdaq futures tacked on 0.17 per cent, after the cash session on Wall Street ended in the red on Tuesday.
In currencies, the dollar held to most of its gains against its peers.
The euro struggled to recover from its 0.7 per cent fall on Tuesday and last bought $1.1501. Sterling edged 0.12 per cent higher to $1.3443, having slid 1.1 per cent in the previous session.
The dollar fell 0.2 per cent to 144.98 yen, after rising to a one-week top against the Japanese currency earlier in the session.
The spike in oil prices is a negative for the yen and euro at the margin as both Japan and the EU are major importers of energy, while the United States is an exporter.
“The war has demonstrated that the US dollar still retains a bit of haven status in certain situations, such as when the war is seen to raise the risk of disrupting global oil supply, and when the war diverts traders’ attention away from those risks that are US-centric,” said Thierry Wizman, global FX and rates strategist at Macquarie Group.
The conflict in the Middle East, combined with prolonged uncertainty over Trump’s tariffs and signs of fragility in the US economy, make for a challenging backdrop ahead of the Federal Reserve’s policy decision later on Wednesday.
US retail sales fell by a larger-than-expected 0.9 per cent in May, data showed on Tuesday, marking the biggest drop in four months.
Expectations are for the Fed to stand pat on rates, though focus will also be on the central bank’s updated projections for the economy and the benchmark interest rate.
“We do not anticipate much novelty from the Fed,” said Erik Weisman, chief economist at MFS Investment Management.
“The only area of interest may come from the new set of forecasts under the summary of economic projections, which may point to slightly slower growth, combined with slightly higher inflation.”
US Treasury yields were steady in Asia after falling on Tuesday, as investors poured into the safe-haven bonds in the wake of latest developments in the Israel-Iran conflict. Bond yields move inversely to prices.
The benchmark 10-year yield was last at 4.4067 per cent, having fallen roughly 6 basis points in the previous session. The two-year yield stood at 3.9582 per cent.
Elsewhere, spot gold rose 0.13 per cent to $3,392.61 an ounce. – Reuters
