Oil prices rise above $105 as Iran crisis causes stock and bond declines

Oil jumped up to $105 per barrel on Thursday, and Iran's denial that it had ever held any kind of talks with the U.S. has raised doubts about a rapid ceasefire for the Middle East war which is now nearly a month old.

The conflicting signals about the extent of 'contact', as well as reports that thousands of U.S. soldiers were being sent to?the?region, halted a three day rebound in world stock markets and reignited sales in global debt market.

Following the fall in Asia – where the Philippines held a central bank meeting that was not scheduled due to the chaos – European stocks and government bonds fell as Germany's head of the central bank said an ECB interest rate hike next week is "an option".

Brent crude oil was just above $106 per barrel, and European gas was 54.5 euros a megawatt-hour. This brought their gains for the entire month up to 45% and 70 %, respectively.

Joachim Nagel, the German central bank's chief, said in an interview that he believes there will be enough data to decide by April whether or not we should take action.

But we shouldn't be afraid to do it just because it is still early.

Donald Trump said on Thursday that Iran "begged" for a deal in order to end the conflict. Iran's Abbas Araqchi, the country's foreign minister, had said earlier that Tehran was examining a U.S. offer but did not intend to hold talks.

The 'war', which was triggered by U.S. and Israeli strikes on Iran late in February, has shook global markets, and shut down the Strait of Hormuz - a channel for a fifth of all global oil and gas flows.

After falling by 4 basis points on Wednesday, the yield of Germany's 2-year bonds, which is sensitive to expectations about interest rates from the European Central Bank, increased 6 basis to 2.67 percent. Bond yields are inversely related to bond prices.

As traders bet on a Bank of Japan rate increase as soon as next month, the U.S. 2-year yield reached 4%. Japan's two-year yield hit its highest in 30 years, at 1.33%.

Pascal Koeppel is the chief investment officer of Vontobel SFA. He said that a prolonged disruption in this Strait would keep energy and inflation prices high, forcing central bankers to tighten.

Koeppel said, "I would be more nervous if we saw ground troops (from the U.S.) in action." If this happened, "we'd trim the risk... and invest more in short-term government bond and gold, obviously".

STRUCTURAL CHANGES

Wall Street futures predicted a lower opening, and Asian markets dropped overnight.

Japan's Nikkei fell 0.3% while worries about rising energy prices slammed South Korea's KOSPI. It dropped 3.2%.

Hong Kong's Hang Seng dropped 1.9%, and China's blue-chips fell?1.3%. This puts MSCI's Asia-Pacific index outside Japan at a monthly drop of 9.5%, the largest since October 2022.

The dollar is gaining 2% this month and has been near its recent highs. This will revive the safe-haven appeal of the currency after last year's more 9% decline.

Traders have priced out all chances of a Federal Reserve rate reduction this year due to fears that inflation will be similar to the one experienced in 2022. This has further supported the dollar.

Gold, a traditional safe-haven, has fallen more than 16 percent this month, on track to be its steepest drop since October 2008. Gold was down 2% on Thursday at $4,421 an ounce, but still almost 50% higher than it was a year earlier.

It will be difficult to reconcile the goals of the U.S., Israel, and Tehran, said Matthias Scheiber. He is the senior portfolio manager at Allspring Global Investments and head of their multi-assets team.

"We think that there are still arguments to be made for higher energy prices at the moment."

(source: Reuters)