Stocks Drop on Renewed Iran Tensions, Dollar Gains: Markets Wrap

(Bloomberg) — Stocks pulled back from record highs and the dollar strengthened after the US and Iran exchanged fire, escalating Middle East tensions and fueling inflation concerns.

MSCI’s Asia Pacific Index for equities fell 0.5% from its highest ever close on Monday, amid speculation the Iran war will escalate. Trading was thin with Japan, China and South Korea all closed for holidays. Earlier, Wall Street gauges also edged lower from their peak, following a rally in crude oil that saw global benchmark Brent rise above $115 a barrel.

Some relief came with oil easing during the Asian session. Brent fell 0.9% to around $113.50 a barrel, paring some of Monday’s 5.8% jump. That helped US equity-index futures advance 0.2%, while contracts indicated a flat open for European stocks. The dollar, which has been the haven of choice during the Middle East conflict, strengthened against all of its Group-of-10 peers.

Renewed Middle East tensions threaten to inject fresh volatility into markets after a month-long rally in risk assets that helped global equities erase war-related losses and climb to record highs on strong earnings from megacap technology companies. Investors remain focused on the Strait of Hormuz, a key waterway that has been blocked for months, keeping energy prices elevated and risking higher inflation and slower economic growth.

“Even if the immediate conflict de-escalates, we expect the aftershocks will remain with us for some time,” said Darrell Cronk at Wells Fargo Investment Institute. “The effects — on energy prices, industrial activity, and geopolitical risk premia — are unlikely to fade quickly.”

Hundreds of vessels were seen clustering near Dubai on Tuesday, as more ships moved away from a still-empty Strait of Hormuz in response to Iran’s efforts to widen its area of control. Still, the US said it had opened a passage through the waterway and CBS reported two American destroyers had crossed into the Persian Gulf.

What Bloomberg Strategists Say…

“Brent and WTI crude futures are weaker on Tuesday, but it is unlikely to offer a strong signal to macro traders amid modest turnover. The big picture is the rapid drawdown of global stockpiles in oil and products, which haven’t yet been fully priced into bonds and stocks.”

— Mark Cranfield, MLIV. For full analysis, click here.

The US fought off Iran’s attacks as it facilitated the passage of two vessels through the Strait of Hormuz. Meantime, the UAE blamed an Iranian drone strike for a fire at its Fujairah port and issued several missile alerts for the first time since a truce between Washington and Tehran took hold.

The wave of attacks came after a plan announced by President Donald Trump to help vessels through the critical waterway, with Tehran warning it would strike US forces if they came near Hormuz. Iran will be “blown off the face of the Earth” if it targets American ships in the region, Trump told Fox News.

Meanwhile, the Australian dollar erased its earlier losses after the Reserve Bank of Australia raised interest rates as most economists had forecast.

Elsewhere, gold edged higher to about $4,550 an ounce on signs dip buyers stepped into the market after a flare-up in hostilities in the Middle East pushed down prices by 2% on Monday.

Treasury 10-year futures climbed 2/32, trimming Monday’s drop. There was no cash trading in Treasuries during Asian hours due to a holiday in Japan.

Treasuries fell across the curve during the US session, pushing 30-year yields to 5%, the highest since July. Traders boosted wagers that the Federal Reserve will have to reverse course and raise interest rates to curb inflation following a surge in oil prices.

“Asian markets are likely to trade with a cautious bias,” said Ritesh Ganeriwal, head of investment at Syfe Pte in Singapore. “This isn’t a full-blown risk-off move yet, but more of a geopolitical wobble that could show up in pockets of Asia — particularly energy-sensitive sectors and FX,” he said.

Corporate Highlights:

HSBC Holdings Plc missed profit estimates as it set aside money for a UK fraud-related exposure and the impact from the conflict in the Middle East and further afield. Palantir Technologies Inc. raised its revenue outlook for the year and beat analyst forecasts, offering a bullish forecast for a polarizing company at the nexus of debates over data, surveillance and artificial intelligence-enabled warfare. UniCredit SpA posted its highest quarterly profit ever, strengthening Chief Executive Officer Andrea Orcel just before his takeover bid for Commerzbank AG will be submitted to the target’s investors. Apple Inc. has held exploratory discussions about using Intel Corp. and Samsung Electronics Co. to produce the main processors for its devices, a move that would offer a secondary option beyond longtime partner Taiwan Semiconductor Manufacturing Co. Amazon.com Inc. unveiled a suite of logistics services that will let businesses buy its existing freight and distribution offerings as a package, sending shares of rival delivery companies such as FedEx Corp. and United Parcel Service Inc. lower. CK Hutchison Holdings Ltd. has agreed to sell its stake in the UK’s largest mobile operator in a buy-out deal worth £4.3 billion ($5.8 billion), as the Hong Kong conglomerate reshapes its global portfolio. Some of the main moves in markets:

Stocks

S&P 500 futures rose 0.2% as of 6:50 a.m. London time Nasdaq 100 futures rose 0.3% The MSCI Asia Pacific Index fell 0.4% The MSCI Emerging Markets Index fell 0.5% Australia’s S&P/ASX 200 fell 0.3% Hong Kong’s Hang Seng fell 1.2% Euro Stoxx 50 futures were little changed Currencies

The Bloomberg Dollar Spot Index was little changed The euro was little changed at $1.1684 The Japanese yen was unchanged at 157.24 per dollar The offshore yuan was little changed at 6.8335 per dollar The British pound was little changed at $1.3523 Cryptocurrencies

Bitcoin rose 1.3% to $80,984.07 Ether rose 1.3% to $2,379.65 Bonds

Australia’s 10-year yield declined three basis points to 4.95% Commodities

Spot gold rose 0.6% to $4,547.90 an ounce West Texas Intermediate crude fell 2% to $104.26 a barrel This story was produced with the assistance of Bloomberg Automation.

–With assistance from Bernadette Toh.

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