Iran attack sets ASX up for uncertain start
MIles J. Herszenhorn And Natalia Kniazhevich
The escalating conflict in the Middle East is raising investor concerns and strengthening the case for safe-haven trades such as Treasuries, gold and the Swiss franc; Oil prices are preparing to rise.
Macro traders said all eyes would be on energy markets when trading fully reopens on Monday, with early indications of volatility also expected as the US dollar and other currencies begin trading in Australia. The possibility of prolonged turmoil in the Middle East and the ripple effects of higher oil prices are giving money managers new reasons to sell stocks and move to safety.
Futures are pointing to a 0.2 per cent decline at the Australian share market open, but this was set before the US attacked Iran on Saturday (Australian time). The Australian dollar was trading at 70.65¢ at 5.26am AEDT.
Investors will adopt a “port first, ask questions later” strategy, according to John Briggs, head of U.S. interest rate strategy at Natixis. “The scale of the attacks and Iran’s retaliation is greater than the market expected,” he said.
Briggs said Treasuries will likely extend their moves starting Friday, when short-term yields fall to levels last seen in 2022. Others monitor for energy bottlenecks. Dave Mazza of Roundhill Financial said he was closely monitoring what was happening to traffic in the Strait of Hormuz, a narrow waterway that handles about a quarter of the world’s seaborne oil trade.
“This is about the Hormuz risk, not retaliation. If shipping remains open, stocks can handle this,” he said. “If not, all bets are off.”
Oil traders noted that Brent crude rose 10 percent to nearly $80 per barrel on Sunday, while analysts predicted prices could rise as high as $100 after U.S. and Israeli attacks on Iran dragged the Middle East into a new war.
The global oil benchmark has rebounded this year, reaching $73 a barrel on Friday, its highest level since July. Futures trading is closed on weekends.
ICIS Energy and Refining Manager Ajay Parmar said, “Although military attacks support oil prices, the most important factor here is the closure of the Strait of Hormuz.”
More than 20 percent of global oil is transported through the Strait of Hormuz.
“We expect prices to open much closer to US$100 per barrel after the weekend and perhaps exceed that level if we see a prolonged outage in the Bosphorus,” Parmar said.
U.S. stocks fell on Friday as Wall Street continued to punish companies that could be losers in the AI revolution. A surprisingly discouraging update on inflation also hurt the market, while oil prices rose on concerns about tensions between the US and Iran.
The S&P 500 fell 0.4 percent, leaving behind its second losing month in the last 10. Dow Jones fell 521 points (1.1 percent) and the Nasdaq index fell 0.9 percent.
The losses come as investors begin knocking out software companies and other businesses they suspect could be displaced by AI-powered rivals.
Block, the company behind Cash App, Square and other businesses, offered a potential signal of what AI could do after Chairman Jack Dorsey said it would cut its workforce by nearly half. This is even though he said 2025 is a strong year for the company, which is sending more cash to shareholders through share buybacks.
“Intelligence tools have changed what it means to start and run a company,” Dorsey said in a letter to investors as Block announced its latest earnings results. “We’re already seeing this internally. A much smaller team using the tools we’ve built can do more and better.”
Twitter’s co-founder also said: “I don’t think we are too early to realize this fact. I think most companies are too late. I believe that within the next year the majority of companies will come to the same conclusion and make similar structural changes.”
Block is laying off more than 4,000 people out of a workforce of more than 10,000. Its shares rose 16.8 percent after making the announcement while reporting its latest quarterly results.
Skilled AI tools that can replace humans could perhaps replace entire companies, or at least eat into their profit margins. Fears about AI disruption have caused sudden sell-offs in stocks seen as potentially threatened, and have also impacted industries as diverse as trucking logistics and legal services.
Salesforce, whose platform helps customers manage relationships with their customers, fell 2.3 percent. It gave back most of its 4 percent gain from the previous day after reporting a better profit than analysts expected.
This pain has also hit private equity firms that buy or lend money to software companies; These companies need to counter the AI threat to continue paying back these loans. Apollo Global Management suffered one of the steepest losses in the S&P 500, losing 8.6 percent. Blue Owl Capital, which was the target of investors due to the loans it gave to the software industry, suffered a loss of 6 percent.
Even companies that are now seeing their revenues and profits soar due to AI-related demand are under pressure. Nvidia fell 4.2 percent, making it the heaviest weight on the U.S. stock market. A day earlier, it slumped to its worst loss since last spring even though it reported better profit than analysts expected and forecast higher revenue for the quarter.
On the winning side of Wall Street, Warner Bros. Netflix, which gained 13.8 percent after abandoning its offer to buy Discovery’s studio and streaming business, was among the top companies. This put Paramount, which owns Skydance, in a position to take over its Hollywood rival.
While Paramount Skydance shares rose 20.8 percent, Warner Bros. Discovery fell 2.2 percent.
The broad market was also hurt by a report showing U.S. wholesale inflation at 2.9 percent last month, well above the 1.6 percent economists had expected.
Bloomberg, A.P.
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