Markets fret as Israel-Iran conflict continues
The escalating conflict between Israel and Iran has seen the dollar make some gains as equities and government bonds lose out. The euro which was trading above $1.16 on Thursday before news of Israel’s strikes on Iran is now trading a little above $1.1550 while sterling is trading at $1.3580 from over $1.36 late on Thursday. Oil prices have spiked higher and the negative sentiment hit equities on Friday with fears of the conflict widening also sending government bond yields higher in Europe and the US. The news is poor over the weekend with continued attacks from both sides so market volatility and uncertainty are likely to continue.
US yields reversed course on Friday. US 10-year government bond yields had been slipping all last week on data showing softer inflation in the US. 10-year yields fell from about 4.5% at the start of the week to 4.35% by Thursday, but the Israel/Iran conflict has led to fears of yet more geopolitical strive impacting global activity, as well as concerns that energy prices may again see again a sustained increase and impact inflation, sent yields back up towards 4.45%. Similarly, German 10-year yields had lost about 10bps between Monday and Thursday but gained 6bps on Friday and are back around 2.55% again. Yields are continuing to tick up in early trading today. Equities came over heavy pressure on Friday, the negative sentiment seeing sizable one-day losses with the S&P down 1.1% and the Eurostoxx down 1.3%. However, Asian markets did make gains overnight and futures are up so we could see a rebound in equities today.
Oil prices sharply higher. Unsurprisingly, oil prices moved higher on Friday with fears the conflict will hamper oil supply and trade in the middle east. A barrel of brent crude rose to $77/barrel on Friday before settling back to trade at circa. $75, still up nearly 6% for the day, and well up on the $60-$68 range prevailing for the past few months. With reports that some Iranian oil facilities have been hit over the weekend and the threat to shipping etc. from the conflict, there is likely to continue to be upward pressure on oil prices at least in the short term.
US consumer sentiment rose sharply in June, according to the University of Michigan index. It rose 8.3 points to 60.5, from 52.2 in May, much higher than expectations. Consumer views on the economy rose as did their own expectations for their personal finances. Also helping was a drop in inflation expectations, with expected prices one year ahead falling to 5.1%, from 6.6%. Survey data from May in the US appears to be benefiting from a lull in trade tensions at the time following the news of the de-escalation of the trade war between China and the US. However, the reading is still well below the 70ish level that prevailed amongst US consumers at the end of last year and 1-year inflation expectations are still close to double what they were at that time also.
Looking to the week ahead, the main events are Federal Reserve and Bank of England monetary policy meetings with decisions due on Wednesday and Thursday respectively though both are expected to stay on hold. Today, we get Euro Area labour costs and Empire manufacturing from the New York Fed.