Wall Street swings on Middle East war uncertainty, ASX set to rise
Staff writers
Updated ,first published
Australia’s stock market rebounded at midday as optimism grew about Washington’s efforts to end an almost month-long war in the Middle East and weaker-than-forecast inflation raised hopes the Reserve Bank might have more flexibility on interest rates.
The S&P/ASX 200 index was up 177.3 points, or 2.1 per cent, at 8556.70 at 12:28 AEDT, extending early gains following the Australian Bureau of Statistics report. Inflation slowed in the 12 months until February It fell to 3.7 percent from 3.8 percent in January. Economists expected this figure to remain unchanged. The Australian dollar was trading at 69.88¢.
The inflation reading shows that consumer prices remained high but began to stabilize before the war in Iran began on February 28. But the data does not include the fuel shock from the conflict, which pushed prices on the bowser to record levels. Federal Treasury modeling has warned that inflation could rise above 5 percent later in the year as the war pushes prices up.
Investors are pricing in the possibility of a rate hike at the RBA’s next meeting in May, dropping it to 54 percent from roughly 60 percent before inflation data.
“Markets have largely scrutinized the CPI in its March report as the CPI precedes the Iran conflict, which is expected to lead to a sharp rise in fuel prices,” said Carol Kong, a strategist at Commonwealth Bank of Australia.
The ASX had already started on a good note this morning, with oil prices falling and Wall Street futures rising following a separate report by Israel’s Channel 12 that Washington wanted a one-month ceasefire and a report that the US had sent Iran a 15-point plan to resolve the Middle East conflict. By midday Wednesday, the international standard Brent was down 6 percent to $98.19 per barrel, while U.S. West Texas Intermediate crude was down 5.2 percent to $87.51 per barrel.
“Crude oil remains the tip of the spear in this headline-driven market,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Group. “Reports that a potential 30-day ceasefire may be in the pipeline ease worst-case pricing scenarios and concerns about demand destruction. Details remain limited and headlines are volatile, but signs that an exit could be taking place are reducing some of the risk premium in the market.”
Airlines rallied in hopes that war reductions would reduce jet fuel bills; Qantas Airways increased by 5.4 percent and Virgin Australia by 9.1 percent. Travel agency Flight Center gained 2.4 percent in value. Qantas’ low-cost airline Jetstar has cut more than 10 per cent of its scheduled flights between and within Australia and New Zealand, describing the measure as “temporary” as a shock to Middle East oil prices hurt demand.
Financial stocks rose on rising investor sentiment, with all four major banks in the green, led by Commonwealth Bank’s 1.7 per cent gain. Westpac was up 2.6 per cent, National Australia Bank was up 1.7 per cent and ANZ Bank was up 2.2 per cent. Investment bank Macquarie rose 4 percent.
Mining stocks also rose; BHP rose 3.2 percent, while Rio Tinto rose 1.6 percent and Fortescue rose 1.2 percent. A $2 billion taxpayer-funded subsidy for Rio Tinto’s aluminum smelter in Queensland has been announced as the Albanian government doubles down on its pledge to save local production with another bailout.
Gold miners rose as gold prices extended gains after news that the United States was seeking a diplomatic path to end the war ended the precious metal’s nine-day losing streak. Bullion rose as much as 1.8 percent to above $4,500 an ounce, contributing to a 1.6 percent rise in the previous session. Northern Star Resources gained 7 percent, Evolution Mining gained 7.9 percent and Newmont gained 8.1 percent.
Cyclical sectors such as retailers and technology shares also performed well amid resurgent risk-on sentiment on the ASX. Wesfarmers, which owns Bunnings and Officeworks, rose 1.1 per cent and JB Hi-Fi rose 2.6 per cent, while on the technology front, WiseTech rose 3.2 per cent and NextDC rose 2 per cent.
On the other hand, energy stocks decreased due to the impact of falling oil prices. Woodside Energy lost 4.9 percent, Santos lost 3.3 percent, and refiners Ampol and Viva Energy lost 3.1 percent and 2.5 percent, respectively.
Coal miners Yancoal and Whitehaven Coal also fell sharply, falling 5.8 percent and 4.1 percent at lunchtime.
Overnight on Wall Street, the S&P 500 fell 0.4 percent after yo-yoing for the day. The Dow Jones fell 84 points (0.2 percent), while the Nasdaq composite fell 0.8 percent.
Markets have been volatile since President Donald Trump expressed hopes that the war with Iran could end soon, saying on Monday that the United States and Iran were having productive talks “concerning a complete and total resolution of our hostilities in the Middle East.” His announcement, made just before Wall Street opened for trading, caused an immediate reversal of momentum in financial markets around the world.
That allayed concerns that the war could cause long-term disruption to the oil and gas industry in the Persian Gulf so large that it would send a burst of inflation to the region’s customers around the world.
But since then, the financial market has received both encouraging and discouraging signals about the war. On the one hand, attacks continued in the Middle East on Tuesday after Iran denied having direct talks with the United States. On the other hand, Pakistani Prime Minister Shehbaz Sharif wrote to X that his country was ready to “facilitate meaningful and definitive negotiations” to end the Iran war.
Trump stated that Iran offered a “gift” as a sign of good faith in the negotiations and that it was related to the flow of energy through the Strait of Hormuz. Washington and regional mediators are discussing the possibility of holding high-level peace talks by Thursday, but are waiting for a response from Tehran, Axios reported.
In the bond market, US Treasury bond yields have risen again, increasing the pressure on financial markets around the world. Higher yields make mortgages and other types of borrowing more expensive for households and businesses, which slows the economy. They have also damaged the prices of all kinds of investments, from stocks to gold to cryptocurrencies.
The Treasury paying more interest makes gold, which pays nothing to its owners, look worse by comparison, and investors have lost some of the excitement that drove gold prices to records earlier this year. The yield on the 10-year Treasury note rose to 4.39 percent from 4.34 percent late Monday and from 3.97 percent before the war.
The yield on the two-year Treasury note, which more closely tracks expectations for what the Federal Reserve will do with overnight interest rates, rose to 3.92 percent from 3.83 percent late Monday.
The Fed entered this year with the expectation of continuing interest rate cuts that would stimulate the economy. But oil prices have risen so much and the threat of high inflation is so great that traders have all but canceled their bets on a rate cut this year.
Some are even betting on the possibility that the Fed may be forced to raise interest rates this year, according to data from CME Group. This was an almost unthinkable scenario before the war began.
Higher interest rates slow the U.S. economy, but they also help keep inflation in check.
With AP, Reuters, Bloomberg
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