Brent Below $100, Stocks Jump on Iran War Hopes: Markets Wrap

(Bloomberg) — Oil declined and equities jumped as optimism strengthened around Washington’s diplomatic push to resolve the nearly month-long Middle East conflict.

Brent crude plunged 6.2% to $98 a barrel, while a gauge of Asian equities climbed 2.3% on expectations that a de-escalation of the Iran war would ease inflation pressures and reduce the need for monetary tightening. The dollar fell 0.3%, while yields on 10-year Treasuries dropped two basis points to 4.34%.

Equity-index futures for the S&P 500 advanced 0.8% helped by reports of diplomatic efforts. The New York Times said the US had sent Iran a 15-point plan and 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, with Brent still up 61% this year despite Wednesday’s decline.

“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.”

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 sees the “possibility of diplomacy” and President Donald Trump signaled that Iran had offered a “present” as a show of good faith in negotiations, noting it was related to flows through the Strait of Hormuz. The US and regional mediators are discussing the possibility of holding high-level peace talks as soon as Thursday, but await a response from Tehran, Axios reported.

“Traders will be keeping one eye firmly on the news wires, with any fresh developments out of the Middle East likely to dictate direction once again,” said Nick Twidale, chief market analyst at AT Global Markets in Sydney.

What Bloomberg’s Strategists Say…

“The increasingly soothing US rhetoric about potential peace negotiations is the focus for investors as they drive stocks and bonds higher, along with sending crude futures lower. That may be a vulnerable strategy given that the actions of the three main parties to the conflict — the US, Iran and Israel — signal very little actual de-escalation.” —Garfield Reynolds, MLIV Asia Team Leader. Click here for the full analysis. In other corners of the market, gold rose for a second day to trade around $4,600 an ounce and Bitcoin advanced to about $71,000.

Attention was also on the bond markets with Federal Reserve officials Michael Barr and Austan Goolsbee signaling that inflation continues to be a key concern for policymakers. The drop in crude oil prices, however, eased worries about prices and damped the case for the Fed to pivot to a rate-hike.

Yields on the policy-sensitive two-year Treasuries fell two basis points to 3.86%.

“Markets are lurching from one headline to the next, liquidity is down, bid/offer spreads wide, and these markets almost untradable,” said Andrew Ticehurst, a strategist at Nomura Australia.

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 $1.8 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 0.8% as of 10:50 a.m. Tokyo time Nikkei 225 futures (OSE) rose 2.4% Japan’s Topix rose 2.5% Australia’s S&P/ASX 200 rose 2.2% Hong Kong’s Hang Seng rose 1.3% The Shanghai Composite rose 0.9% Euro Stoxx 50 futures rose 1.4% Currencies

The Bloomberg Dollar Spot Index fell 0.2% The euro was little changed at $1.1617 The Japanese yen was little changed at 158.71 per dollar The offshore yuan rose 0.1% to 6.8869 per dollar Cryptocurrencies

Bitcoin rose 1% to $70,781.1 Ether rose 0.6% to $2,160.97 Bonds

The yield on 10-year Treasuries declined two basis points to 4.34% Japan’s 10-year yield declined 1.5 basis points to 2.250% Australia’s 10-year yield declined 11 basis points to 4.94% Commodities

West Texas Intermediate crude fell 5.2% to $87.52 a barrel Spot gold rose 2.7% to $4,598.22 an ounce This story was produced with the assistance of Bloomberg Automation.

–With assistance from Ruth Carson, Rob Verdonck, David Finnerty and Charles Gorrivan.

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