LONDON/NEW YORK, July 8 (Reuters) – Oil surged and stocks and bonds dropped on Wednesday, after U.S. President Donald Trump said the memorandum of understanding that provided a framework for the ceasefire with Iran “was over” after the two sides traded attacks overnight.
Trump spoke in Ankara at a NATO summit in the Turkish capital. Oil prices rose 5% to $78 a barrel and European stocks dropped 1.1%, while the dollar jumped and government bond yields rose. U.S. stocks were lower, with the Nasdaq down 0.8%.
COMMENTS:
ROB HAWORTH, SENIOR INVESTMENT STRATEGIST, U.S. BANK WEALTH MANAGEMENT, SEATTLE:
“The market has learned at this point to look through, because it doesn’t seem like there’s a willingness to stay with the conflict for longer by this administration, even though the threats are meaningful. With attacks and that comment that the ceasefire is over, it seems like we should see more pressure, but just thinking through this on oil, the lows during the conflict were like in the $78 to $82 region for WTI, and we’re not even above $75 yet.
“And so I think that’s kind of the signal point to us that the market is having to take this conflict more seriously is if we start to exceed those levels. Duration is the key here – how long does this go on? Do we actually strike Iranian infrastructure?
“If we see damage to Iranian infrastructure, the market may have to respond more seriously to that because there’s likely Iranian retaliation. And they’ve had success at shutting down shipping using their, with the Revolutionary Guard, using their speedboats and mines to kind of reassert the threats in the Strait.”
JACK JANASIEWICZ, LEAD PORTFOLIO STRATEGIST, NATIXIS INVESTMENT MANAGERS, BOSTON:
“I think it’s now taken a backseat. I think you have to then start thinking about a full ground invasion sort of thing to really alter the perception of the market. Because we’ve already been there with the kinetic war, just lobbing missiles at each other, and the market really held up pretty well against that backdrop. It’s been going on for long enough where I just think it’s now a backstory. The market’s really not focusing on it that much.
“Obviously, the risk is if oil prices continue to climb back up, but I think we’ve sort of gotten comfortable with the backdrop here that the worst-case scenario is going to be avoided at all costs. We’ll get some of these interim blips along the way, but that worst-case scenario that I outlined, there’s a low probability of that. That’s really what the market was thinking all along anyway. And that’s why the market held up and was pretty resilient over that time. So, I don’t think this changes that backdrop or anything.”
BRUCE ZARO, MANAGING DIRECTOR, GRANITE WEALTH MANAGEMENT, PLYMOUTH, MASSACHUSETTS:
“What is interesting to me is the action of oil prices. Oil prices have been on a downward trend… With OPEC coming in and adding more oil to the market, the potential for oil is to go lower and that really takes one of the biggest worries off the table… When I hear that the ceasefire is off, I think it’s a more muted reaction than the market would have put on than even just maybe four weeks ago, six weeks ago, eight weeks ago.”
ANGELO KOURKAFAS, SENIOR GLOBAL STRATEGIST, INVESTMENT STRATEGY, EDWARD JONES, ST. LOUIS, MISSOURI:
“The spike in oil prices and higher bond yields helped drive a near 10% correction in the first half of the year, but they also underscored the economy’s resilience to these shocks. Renewed geopolitical risks may fuel some near-term risk-off sentiment, but we do not expect investors to react to this round of uncertainty in the same way, for several reasons.
“First, neither the U.S. nor Iran appears inclined toward a prolonged conflict, in our view, and investors have already seen how reacting to fast-moving headlines can lead to suboptimal portfolio outcomes. Second, we think it would likely take a much larger and sustained rise in oil prices to materially alter the outlook for the economy and corporate earnings. Finally, oil supplies have begun to recover, providing a renewed buffer for energy markets, while the improving labor market helps support household incomes—even as the tailwind from higher tax refunds fades.”
IAN LYNGEN, HEAD OF U.S. RATES STRATEGY, BMO CAPITAL MARKETS, NEW YORK:
“In practical terms, the potential reset on the war in Iran implies that the near-term economic data is less relevant – at least on the margin. June’s core inflation figures will be downplayed in the event that crude oil continues to march higher throughout the month of July. What had been a downward influence on headline inflation (and potential pass-through to core) appears to be reverting to an upside risk.
“Putting this in the context of this afternoon’s FOMC Minutes, the official update will now appear somewhat stale given that the Middle East conflict no longer appears to be resolved, or at least on the path toward a near-term resolution.
“Nonetheless, investors will be eager for any insight on the extent to which the Fed’s reaction function to the evolution of the real economy has changed under Warsh’s leadership, if at all.”
HAMAD HUSSAIN, CLIMATE AND COMMODITIES ECONOMIST, CAPITAL ECONOMICS, READING, UK:
“The latest exchange of military strikes in the Middle East supports our view that oil prices will be volatile over the coming months, and will face bouts of upward pressure. That said, under the assumption that some form of a ceasefire ends up holding and oil flows continue to recover, we think Brent crude prices will settle close to current levels at the end of this year.”
FIONA CINCOTTA, SENIOR MARKET ANALYST, CITY INDEX, LONDON:
“This was always a very fragile peace process. The fact that oil prices had already fallen back to pre-war levels suggested that the market was a little bit ahead of itself”
“Oil prices could continue to rise if we see the Strait of Hormuz close again and the unwind of all the positivity we’ve seen over the last few weeks.”
ANEEKA GUPTA, DIRECTOR, MACROECONOMIC RESEARCH, WISDOMTREE, LONDON:
“It’s a big wake-up call for the markets because the expectation was that following the MOU, we were likely to start to see the flow of oil coming back into the markets. And we saw inflation expectations being dialed down.
“The way we’re looking at it now is what has changed materially is the (Iranian) oil waiver is gone. It’s removed a very key incentive for Iranian compliance.”
“Trump’s comments add that further layer of additional risk premium into the markets. But the reality is with Trump, you always have TACO (‘Trump always chickens out’) trade at play.”
“He was fast approaching the midterm election. The fact that he wanted to do this memorandum of understanding with Iran implied that he wanted to improve his ratings ahead of the winter elections, and that is going to be a critical factor for him to keep in mind.”
ARNE PETIMEZAS, DIRECTOR RESEARCH, AFS GROUP, AMSTERDAM:
“Remember where we came from with oil prices and bond yields. Much higher levels. The market hasn’t reached levels that would panic Trump.”
“And do we take Trump literally or seriously? He says that the peace deal is over, but that U.S. negotiators can continue doing their work. We also know that Trump can turn on a dime. He could have an about-face today, tomorrow, next week, or perhaps later. I don’t see him waging war with Iran into the elections.”
CHRIS BEAUCHAMP, CHIEF MARKET STRATEGIST, IG, LONDON:
“It’s clearly not what the market’s wanted and it really weighs heavily on sentiment.”
“I think how this will play out is that there will be maybe a bit more of a few more exchanges, and then they probably will go back to the negotiation because both sides want it. So the MOU might be over, but as it proved before that, they didn’t use MOU to have a ceasefire that allowed markets to rally.”
“Things that have come just a long way in such a short space of time, you’d be looking and thinking there’ll be a summer swoon that just weighs heavily on markets and maybe doesn’t take us all the way back to these lows of March. We are overdue a little bit of a spike (lower). We’ve had a relatively quiescent VIX. Everything has been almost too easy for investors.”
KHOON GOH, HEAD OF ASIA RESEARCH, ANZ, SINGAPORE:
“The main thing is really whether or not the Strait of Hormuz remains open and we still see traffic (and) whether or not oil can continue to flow.”
“If there’s still some traffic going through, then I think that will limit how high oil prices will go. It also depends on whether we see a return to the full-on onslaught of attacks, in particular whether or not Iran launches fresh attacks on the GCC neighbours…we haven’t really seen a much broader spillover from the risk off tone yet, because I think markets are just trying to assess what the situation is.
“A lot of the strategic reserves have already run down, so we could get back towards worrying about potential bottleneck shortages once again. But I think markets at this stage don’t want to jump immediately to that conclusion because, everyone did early on and, of course thankfully, it didn’t play out.”
LEE HARDMAN, SENIOR CURRENCY ANALYST, MUFG, LONDON:
“This looks like the most significant flare up in tensions since the deal so far, of course it’s hard to say what will happen, but it’s definitely adding to the uncertainty.
“We’ve seen a big jump in the price of oil, but spillovers into FX so far are more limited. The dollar is benefiting from higher energy prices, and that positive correlation has been strengthened from the recent hawkish shift in rhetoric from the Fed. If energy prices go higher, and that means inflation goes higher, then we’re more likely to get rate hikes, benefiting the dollar.”
(Reporting by Caroline Valetkevitch, Lewis Krauskopf, Laura Matthews and Chuck Mikolajczak in New York and the EMEA markets team,; Compiled by Amanda Cooper, Colin Barr; Editing by Yoruk Bahceli)
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