Trading in US stock, bond and oil futures resumes in earnest at 6pm New York time on Sunday.
(May 18): With no clear-cut end in sight to the Iran war, investors enter a new week under the spell of its key economic consequence: rising global interest rates, and the inflation threat they signal.
The S&P 500 Index fell the most since March last Friday as a global bond sell-off drove 10-year US Treasury yields above 4.5%, pushed Japan’s 30-year borrowing costs to 4% and sent yields on UK long bonds to a 28-year high. In oil markets, West Texas Intermediate rose 4% last Friday to settle above US$105 a barrel, while global benchmark Brent crude settled above US$109.
Reports on Iran’s semi-official news outlets suggest both sides in the conflict remain far apart in negotiations to end the war. The Mehr news agency said Washington offered “no tangible concessions” while seeking “to obtain concessions that it failed to obtain during the war, which will lead to an impasse in the negotiations”.
Trading in US stock, bond and oil futures resumes in earnest at 6pm New York time on Sunday. The dollar was quoted mixed against its Group-of-10 peers as currency trading got underway in Sydney.
“Like a domino effect, the continued closure of the Strait of Hormuz will keep upward pressure on oil prices, which will likely continue to push inflation readings higher and cause bond yields to rise,” said Sam Stovall, the chief investment strategist of CFRA. “This combination will reduce consumer and investor confidence and may trigger a digestion of recent stock-price gains.”
US President Donald Trump indicated his patience is wearing thin, posting on social media on Sunday that “For Iran, the clock is ticking, and they better get moving, fast, or there won’t be anything left of them. Time is of the essence!”
A drone attack that sparked a fire at a United Arab Emirates nuclear plant highlighted the fragility of the ceasefire.
For risk assets, Friday’s session was a rare setback in what had been an almost unbroken trip upward during April, with a surge in stocks, crypto and credit reflecting solid earnings and economic expansion despite the war’s impact on prices.
Speculation has grown that the effective closure of the Strait of Hormuz will deepen the energy disruptions that risk fueling inflation. Back-to-back data last week showing mounting price pressures in the US prompted traders to boost bets the US Federal Reserve will raise interest rates.
Last Friday, 30-year UK gilt yields surged as much as 20 basis points to above 5.8% as markets braced for a leadership challenge to Prime Minister Keir Starmer. The yield 30-year Japanese bonds hit 4% for the first time since the debt was issued in 1999, reflecting renewed concern over Tokyo’s fiscal trajectory. Yields also rose in Germany, Spain and Australia. Group-of-Seven finance chiefs are set to discuss the sell-off at a meeting this week.
Investors won’t see a rate cut at the next Fed policy meeting, according to DoubleLine Capital LP’s chief executive officer, Jeffrey Gundlach.
“People were looking for two rate cuts this year, but the inflation market has simply not cooperated,” Gundlach said on Fox News’ Sunday Morning Futures. “It’s just not possible, in my view, to cut interest rates when the two-year Treasury is almost 50 basis points higher than the fed funds rate.”
A global rush to stockpile manufactured goods on fears of an energy-supply crunch is likely to overshadow business surveys in the coming week gauging the impact of the war. While May purchasing manager indices from Australia to the US are projected to show continued expansion, the question will be the extent to which that points to resilience, or is simply evidence of manufacturers running on fumes before the energy shock fully hits.
“Ultimately, the Iran war will find a conclusion and commodity prices will come back down towards pre-war levels,” said Scott Ladner, the chief investment officer of Horizon Investments. “But with earnings season in the US coming towards its close, investors are focusing again on the macro picture, and that picture is being painted with higher interest rates, always a headwind for equity markets.”
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