World markets rapidly reversed course on Monday after US President Donald Trump said he would order the military to postpone any strikes against Iranian power plants and energy infrastructure, easing uncertainty and fear over the repercussions of a deeper oil shock.
The reaction from markets was swift and marked: Brent crude oil futures fell sharply, the dollar fell against other major currencies, stock markets rallied and government borrowing costs fell back.
“It’s exactly what the market needed to hear to sort of reprice worst-case expectations. This means there is potential for the Strait of Hormuz to reopen; it’s being priced in almost immediately,” said Fiona Cincotta, senior market analyst at City Index.
“Whether this recovery in equities continues depends on whether we get more supportive comments, particularly from Iran as well, corroborating this idea that there is progress being made.”
Trump said the postponement followed productive conversations with Iran.
But Iran’s Tasnim news agency, citing an Iranian official, said that the Strait of Hormuz would not return to pre-war conditions and energy markets would remain unsettled, adding that no negotiations with the US were underway.
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The headlines from Iranian media contradicting Trump’s comments tempered market moves, Mizuho multi-asset strategist Evelyne Gomez-Liechti noted.
But for now, optimism largely prevailed in markets and Brent crude prices were last down 7 per cent to around $103 (€88.79) a barrel, though cutting losses after they plunged as much as 15 per cent to $96 earlier. They had reached $119 on Friday.
Government bond yields, which had risen ahead of Trump’s comments as investors doubled down on their expectations for central bank rate hikes in Europe, dropped sharply.
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US stock futures were 1.4 per cent higher, pointing to a strong open on Wall Street, while European stocks were last up 0.7 per cent.
In the US, Treasury yields were two to three basis points lower across the curve, with the 10-year yield last down to 4.37 per cent.
The dollar was broadly soft, having traded higher against most other currencies until the headline hit.
The euro was last up from an earlier low of $1.1485 to the dollar.
Britain’s two-year bond yield, which has borne the brunt of a bond selloff since the start of the conflict, was last down 6 basis points on the day, having risen 13 bps earlier. The 10-year yield dropped from its highest since 2008.
Investors trimmed their bets on Bank of England rate hikes, now fully pricing in two hikes by year-end versus more than three earlier on Monday, while they also cut expectations for the European Central Bank.
“It’s clearly jawboning in the face of the meltdown that we’ve seen. We’re seeing a bit of a knee-jerk reaction to this positive news,” said Elias Haddad, global head of markets strategy at Brown Brothers Harriman.
“There’s certainly room for a bit of an unwind in the fear trade. A more sustained rally in risk assets will depend on whether this is legit de-escalation or simply a pause before a next leg up in escalation.”
Global markets have been rattled by the conflict in the Middle East, with stocks and bonds selling off in tandem last week as concerns about inflation and slower economic growth intensified. That’s also weighing on policymakers, with Federal Reserve chair Jerome Powell saying the central bank needs to see more progress on inflation before cutting rates again. - Reuters/Bloomberg
