Oil soars, shares rattled as Trump dumps Iran nuclear deal
Crude oil prices jumped back to near 3-1/2-year highs on the 9th May after President Donald Trump pulled the United States out of an international nuclear deal with Iran, sparking worries about fresh tension in the Middle East and global oil supplies.
Asian shares ticked lower as renewed US sanctions on Tehran were seen as disruptive for many companies who have deals with Iran. Mr Trump’s move is also seen as risking worsening already-tense relations between Iran and US allies in the region.
However, European shares looked set to start flat on Wednesday and US S&P futures were little changed.
Financial spread-betters expect London’s FTSE to open 7 points higher at 7,573, Frankfurt’s DAX to open 22 points higher at 12,934 and Paris’ CAC to open up 4 points at 5,526.
“In the very short term, it looks as if the impact of heightened geopolitical worries was limited to oil markets. But that is not the end of the story,” said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
“US sanctions could affect various industries. And tensions between Iran and Israel look set to intensify. Those will begin to cap share prices,” he added.
West Texas Intermediate (WTI) crude futures traded at US$70.62 per barrel, up 2.3 percent and near the peak on the 7th May of US$70.84, the highest level since November 2014.
Brent crude futures jumped as much as 2.5 percent to a 3-1/2-year high of US$76.75 in Asian trade on the 9th May.
Iran, the third-biggest producer among the Organisation of the Petroleum Exporting Countries, produces about 3.8 million barrels per day (bpd), or about four percent of the world’s oil supplies.
The US Treasury said it will reimpose a wide array of Iran-related sanctions after the expiry of 90- and 180-day wind-down periods, including those aimed at Iran’s oil sector and transactions with its central bank.
MSCI’s broadest index of Asia-Pacific shares outside Japan was flat, while Japan’s Nikkei fell 0.4 percent.
While some investors drew comfort from the fact Iran pledged to remain in the nuclear deal despite the US pull-out, they are wary of escalating tensions in the Middle East.
Israel is on a high alert, mobilising reserve forces while Syrian state media accused Israel of launching missiles at a target near Damascus on the 8th May just after Mr Trump’s announcement.
In neighbouring Lebanon, Hezbollah and its political allies had just made significant gains in a parliamentary election, boosting an Iranian-backed movement fiercely opposed to Israel and underlining Tehran’s growing regional clout.
On Wall Street, caution over rising political risks was palpable. Energy shares gained 0.78 percent and defence contractor stocks rose, with Lockheed Martin up 1.3 percent and Northrop Grumman 3.3 percent.
Boeing, however, fell 0.6 percent as a deal to sell jets to Iran was seen as under threat. The S&P500 closed down 0.03 percent, paring earlier losses of 0.65 percent. The Dow Industrial Average and Nasdaq were little changed as well.
Souring risk sentiment is hitting emerging markets, which have been clobbered in recent weeks by concerns about capital outflows, as the prospect of higher US interest rates lures investors back to US bonds rather than riskier assets.
Countries with high perceived political risks, such as Brazil and Turkey, were among the worst hit.
The Brazilian real hit a near two-year low and the Turkish lira reached a record low. Since the start of this week, those currencies are down 1 percent and 2.7 percent, respectively.
The Indonesian rupiah hit a 2-1/2-year low and has slid one percent this week.
Among major currencies, the risk-sensitive Australian dollar hit an 11-month low of US$0.74245 and last stood at US$0.74355.
The euro hit a 4 1/2-month low of US$1.1838 on the 8th May and last stood at US$1.1845, having declined more than four percent in the past three weeks.
The currency was hit by increasing prospects of another election in Italy as the political impasse there has continued since early March’s inconclusive ballot.
Pound sterling stood at US$1.3526, near a four-month low of US$1.3485 touched on the 8th May.
The dollar rose 0.4 percent to 109.51 yen, edging near its three-month high of 110.05 yen touched last week as higher oil prices help to lift US bond yields.
The yield on ten-year US Treasuries was at 2.9873 percent.
Source: Reuters