Oil Gains, US Stock Futures Drop on New Strikes: Markets Wrap

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(Bloomberg) — Oil gained and US equity futures ticked lower after the US said it is striking Iran for the second straight day, an escalation of violence that threatens to choke shipping through the Strait of Hormuz.

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West Texas Intermediate crude jumped 2.2% to more than $75 a barrel at the open in early Asia trading after notching its biggest daily climb in five weeks in the prior session, with Brent crude briefly topping $80 a barrel. S&P 500 contracts slipped 0.1% after the US benchmark closed down 0.3% on Wednesday. Asian equity futures pointed to gains in Japan and South Korea and losses in Hong Kong and Australia.

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The additional strikes were started “to further degrade their ability to threaten freedom of navigation in the Strait of Hormuz,” the US Central Command said in a social media post. The attacks came just hours after President Donald Trump at the NATO summit in Turkey said the US would probably target the country again and could resume a blockade, raising concerns about a return to all-out war. 

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The moves posed the greatest threat yet to talks toward a broader agreement to end the war that has jolted global markets. The US has blamed Iran for attacks on some ships in recent days. Tehran has said repeatedly it won’t allow vessels to transit the key Strait of Hormuz without its permission.

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“Markets weren’t initially taking the re-escalation in US-Iran tensions too seriously earlier this week,” said Fawad Razaqzada at Forex.com. “But today, that seems to have changed.”

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The flare-up in tensions and jump oil prices rekindled inflation concerns, prompting money markets Wednesday to boost their bets the Federal Reserve will lift interest rates by October, compared with December previously. 

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Meanwhile, the two-year yield, which closely tracks expectations for the Fed’s monetary policy, rose as much as five basis points to 4.23%, within a basis point of its peak last month, amid a selloff in global bond markets. The 10-year yield climbed as much as four basis points to 4.59%, the highest since late May.

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Veteran strategist Ed Yardeni said the rupture in the ceasefire between the US and Iran risks sparking a fresh acceleration in price growth, which in turn could compel the Fed to raise interest rates.

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A few Fed officials in their most-recent policy meeting said there was a case for raising rates, though they ultimately supported the decision to leave rates on hold. More generally, minutes of their June gathering reflected growing concern over inflation just as worries over the labor market slightly receded.

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“One thing is certain: future policy is heavily contingent on the political situation in the Middle East,” said Jeffrey Roach at LPL Financial. “If we can tease out any forward guidance from the minutes, it would be the committee is working through a wide range of scenarios and will not commit to a specific scenario until the incoming data provides necessary clarity.”