Oil hits 1-week high as dollar weakens on Israel-Iran strike report

By Anand Krishnamoorthy

 

Oil rose to the highest level in a week and the dollar weakened after CNN reported that new US intelligence suggested Israel is preparing for a potential strike on Iranian nuclear facilities.

 

Brent crude jumped 1.7 per cent. It wasn’t clear that Israeli leaders had made a final decision to carry out the strikes, CNN said, citing officials it didn’t name. The Swiss franc and the yen, traditional haven assets, inched higher. Yields on Japanese super-long sovereigns dipped after Tuesday’s surge, while those on the 30-year US Treasury hovered around the 5 per cent mark. Contracts for the S&P 500 and the Nasdaq 100 dropped 0.4 per cent while Asian shares rose 0.8 per cent. 

 

Geopolitical tensions may add headwinds to the markets, which had calmed recently after a month of turmoil from the tariff blitz unleashed by US President Donald Trump. Investors are scouring for clues on whether recent gains in stocks can sustain, even as the Federal Reserve waits to gain a clearer view of the economy before lowering interest rates.

 

“Most professional investors are still quite cautious, and I think rightly so, given the economic outlook, the policy uncertainty, which is ultra high,” said Joe Little, global chief strategist at HSBC Asset Management in Hong Kong. 

 

Oil has been volatile since last week on mixed headlines about the fate of Iran-US nuclear talks, which could pave the way for more barrels to return to a market that’s expected to be oversupplied later in the year. An attack by Israel would hinder any progress in those negotiations and add to unrest in the Middle East, which supplies about a third of the world’s crude.

 

The tensions triggered dollar selling and yen buying by risk-averse investors. Most Asian currencies climbed while a gauge of the greenback declined for a third straight day.

 

“The US dollar has of course lost its luster as the undisputed safe reserve asset,” said Richard Franulovich, head of FX strategy at Westpac Banking Corp. As such, “these periodic geopolitical flare ups are going to show up more forcefully in alternatives like the yen and Swiss franc going forward.” 

 

A weaker dollar and lower interest rates will aid Asian shares, Morgan Stanley strategists said. The Morgan Stanley Asia Pacific Index rose 0.7 per cent Wednesday.

 

Asian markets could benefit further from a rotation out of US assets, but that depended on whether trade deals can be reached before the July 8 expiry of the 90-day US tariff pause, according to Bloomberg Intelligence. A weaker dollar is driving “hot money inflows” across emerging Asia as local currencies strengthen.

 

Long-term Treasury yields climbed Tuesday as fractious US budget negotiations kept focus on the growth in deficit spending, with traders piling into bets that they will surge further. Trump is growing frustrated with demands to significantly boost the cap on the state and local tax deduction, according to a senior administration official, signaling a deadlock as Republicans aim to quickly pass a giant tax-cut bill.

 

Traders are piling into bets that long-term Treasury yields will surge on concerns around the US government’s swelling debt and deficits. Bets favoring the 10-year yield testing 5 per cent are among some of the bigger positions.

 

In Japan, the sovereign debt market is flashing a warning to the central bank that dialing back its bond purchases needs to be done with great care. The issue is in sharp relief this week, with investors shunning an auction of government debt and yields soaring, just as market participants sit down with Bank of Japan officials to share views on tapering. 

 

Meanwhile, Federal Reserve Bank of St. Louis President Alberto Musalem said tariffs will likely weigh on the US economy and weaken the labor market. Musalem said the Fed can deliver a “balanced response” to both inflation and employment as long as Americans’ outlook on future prices remains anchored at the central bank’s 2 per cent target.

 

Some of the main moves in markets:

 

Stocks 

S&P 500 futures fell 0.4 per cent as of 1:50 p.m. Tokyo time

Japan’s Topix was little changed

Australia’s S&P/ASX 200 rose 0.6 per cent

Hong Kong’s Hang Seng rose 0.5 per cent

The Shanghai Composite rose 0.4 per cent

Euro Stoxx 50 futures were little changed

  Currencies 

The Bloomberg Dollar Spot Index fell 0.4 per cent

The euro rose 0.5 per cent to $1.1335

The Japanese yen rose 0.6 per cent to 143.68 per dollar

The offshore yuan rose 0.1 per cent to 7.2054 per dollar

  Cryptocurrencies 

Bitcoin rose 0.4 per cent to $107,412.61

Ether rose 1.6 per cent to $2,553.6

  Bonds 

The yield on 10-year Treasuries advanced two basis points to 4.50 per cent

Australia’s 10-year yield advanced five basis points to 4.45 per cent

  Commodities 

West Texas Intermediate crude rose 1.8 per cent to $63.14 a barrel

Spot gold rose 0.5 per cent to $3,305.70 an ounce