Oil jumps on Trump’s war threat, stock rally fades

Oil jumped, stocks and bonds fell after President Donald Trump signalled an escalation of the Iran war, saying the US would hit the country “extremely hard” over the next two to three weeks.

MSCI’s Asia Pacific share index dropped 1.7%, reversing a rebound from its worst month in more than 17 years, as Trump’s speech undermined a nascent global stocks rally. Equity-index futures for the US and Europe declined more than 1% as concerns grew that a prolonged war will keep oil prices higher and weigh on economic growth.

Brent crude jumped 5% to over $106 a barrel as the conflict keeps the Strait of Hormuz largely closed. The dollar strengthened, reinforcing its appeal as the haven of choice during the war. Treasuries fell, with the yield on two-year climbing four basis points to 3.84%. Precious metals tumbled with gold falling 1.6% to about $4 680 an ounce.

“Trump’s speech was not what the market had hoped for — namely, signals pointing toward an end to the conflict,” said Jumpei Tanaka, head of investment strategy at Pictet Asset Management Japan. “Instead, he suggested a potential escalation. The remarks are being interpreted as a negative factor for the equity market.”

Investor confidence had been building in the run-up to Trump’s speech after the president had earlier said he foresaw the US ending the war with Iran within two to three weeks. The change of tone in Trump’s speech damped hopes for a quick conclusion of the conflict that has already roiled financial markets and pushed several equity gauges into correction territory.

In the nearly 20-minute speech, Trump didn’t outline any shift in Iran policy, nor did he provide specifics on how operations would proceed beyond what he has said before.

Trump said the core strategic objectives are nearing completion in a speech from the White House. The president nevertheless suggested that military operations may soon escalate, saying “over the next two to three weeks, we’re going to bring them back to the stone ages where they belong.”

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The rare prime-time speech came as the president is grasping for an off-ramp in a conflict that has quickly slipped out of control.

“The market was craving some clarity on when the conflict will finish, but this speech has just added more uncertainty,” said Nick Twidale, chief market analyst at AT Global Markets. “Investors are clearly unimpressed and I think we could see more downside for global markets today.”

What Bloomberg’s strategists say…

“Risk rallies will remain volatile in the short term and vulnerable to sustained reversals in the longer term because of the likelihood that even the best-case scenario for the conflict will create sustained, deep damage to global supply chains. This week’s back-and-forth looks to be entrenching the likelihood that shipping through Hormuz will remain well short of pre-war levels for a substantial period.”  – Garfield Reynolds, MLIV Asia Team Leader. Click here for the full analysis.

Hours ahead of the speech, the Iranian president took the unusual step of issuing a letter addressed to Americans, arguing that his country has no enmity with the US and has acted in self-defence.

He warned that “continuing along the path of confrontation is more costly and futile than ever before” and noted that attacks on infrastructure directly target the Iranian people.

Earlier, Trump said that Iran has asked for a ceasefire, adding that the US would only consider it if the Strait of Hormuz was reopened. Iran’s foreign ministry said the claim of a ceasefire request was “false and baseless,” according to state TV.

The latest back-and-forth follows separate comments from Trump on Tuesday when the president said he foresaw the US ending the conflict within two to three weeks, sparking a sharp rally in stocks.

“While everyone wants to move on from this, there is still much to unpack from the past month’s events in the Middle East,” said Ken Wong, Asian equity portfolio specialist at Eastspring Investments Hong Kong. “The question now is how much these developments will ripple through the global economy over the coming quarters.”

Some of the main moves in markets:

Stocks

• S&P 500 futures fell 1.1% as of 12:17 p.m. Tokyo time
• Japan’s Topix fell 1.2%
• Australia’s S&P/ASX 200 fell 0.9%
• Hong Kong’s Hang Seng fell 0.9%
• The Shanghai Composite fell 0.5%
• Euro Stoxx 50 futures fell 1.6%
• Currencies
• The Bloomberg Dollar Spot Index rose 0.3%
• The euro fell 0.4% to $1.1546
• The Japanese yen fell 0.4% to 159.39 per dollar
• The offshore yuan fell 0.1% to 6.8874 per dollar

Cryptocurrencies

• Bitcoin fell 2% to $66 780.63
• Ether fell 3.4% to $2 070.18

Bonds

• The yield on 10-year Treasuries advanced four basis points to 4.36%
• Japan’s 10-year yield advanced 3.5 basis points to 2.335%
• Australia’s 10-year yield advanced 11 basis points to 5.02%
• Commodities
• West Texas Intermediate crude rose 4% to $104.10 a barrel
• Spot gold fell 1.4% to $4 690.19 an ounce

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