(Oct 2) : Asian stocks were poised to fall as oil surged on the prospect of renewed conflict between the US and Iran, reviving concerns about the inflationary impact of higher energy prices. Bonds will be in focus after a rebound in Treasuries.
Equity-index futures for Japan, South Korea and Taiwan pointed to losses at the open, while contracts for Australia edged higher. US stock futures advanced after a volatile Wall Street session that saw equities eke out modest gains.
Treasuries rebounded from a bruising global bond selloff, even as oil prices climbed, as pressure in European markets fueled demand for haven assets. The yield on 10-year bonds retreated from a 24-year high. The rally was also supported by dovish commentary from Federal Reserve officials. A gauge tracking dollar strength rose to the highest since late June on Thursday, while gold advanced 0.5%.
The prospect of renewed US-Iran hostilities lifted oil, with US crude rising in early Asia trading after Brent jumped more than 4% to reclaim US$100 a barrel. The Pentagon may soon deploy another aircraft carrier and 10,000 sailors and marines to the Persian Gulf, giving US commanders more options should President Donald Trump decide to escalate attacks on Iran.
The prospect of another flare-up in the Middle East leaves investors balancing the inflationary threat from higher oil against signs the Fed may take a more measured approach to further tightening. The path for energy prices and any escalation between Washington and Tehran may determine whether the rebound in Treasuries can hold and how much pressure spills into equities.
“We continue to think the Fed remains oriented towards a limited two or three hike mini-cycle in the base case,” said Krishna Guha at Evercore. “It does not currently see demand so strong as to create obvious danger of demand-driven overheating risk.”
The bounceback in the US bond market gathered pace on Thursday as concern around France’s fiscal and political situation pushed euro-area risk premiums higher. Long-term UK bond yields also shot past 6%.
In the US, haven appetite helped push the yield on two-year Treasuries lower by as much as 14 basis points to 4.74%.
Also underpinning gains were remarks from Federal Reserve vice chair Philip Jefferson, who said it may take more time to judge whether further interest-rate increases are needed.
He echoed comments from New York Fed president John Williams, who on Tuesday said there was no urgency in considering another hike after the Federal Open Market Committee’s decision to lift rates in September.
Wall Street analysts and traders said this week that crude flows from the Middle East are closing in on pre-war levels. Iran, however, appeared to have loaded no crude oil onto tankers in September, the latest indication of a US naval blockade’s effectiveness in severing the Islamic Republic’s access to energy markets.
Investors are wary that an increasingly cornered Iran could respond by intensifying the conflict.
“The increase in flows remains highly vulnerable to escalation,” said Hamad Hussain, a climate and commodities economist at Capital Economics. “I’d also describe the market as being structurally tight given the relatively low level of inventories after six months or so of drawdowns. That puts a floor under prices.”
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