Oil Holds Gains as Iran Stokes Inflation Worries: Markets Wrap

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(Bloomberg) — Oil held gains and Asian stocks were set to track Wall Street lower after the standoff between the US and Iran intensified, raising concerns that disruptions to energy supplies could accelerate inflation.

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West Texas Intermediate crude was little changed in early trading after soaring 9.4% on Monday — its biggest one-day gain in more than three months. Equity futures indicated further declines in Asia benchmarks, after a regional gauge fell the most in more than two weeks. S&P 500 contracts were steady after the US index slipped 0.8%.  

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President Donald Trump said the US would restart a blockade on Iranian ships transiting Hormuz and charge all other cargo a 20% reimbursement. Money markets priced in about 50% odds of a Federal Reserve hike in July as Governor Christopher Waller said officials may need to raise rates to tame price pressures.

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The latest wave of attacks between the US and Iran dashed hopes for a near-term normalization of traffic through the key energy chokepoint. Trump said in a radio interview that “we’re going to hit them very hard tonight, and we’re going to hit them hard tomorrow.”

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“The energy sector is once again in the limelight as the status of the Strait of Hormuz is driving price action in global markets,” said Ian Lyngen at BMO Capital Markets. “There is a growing sense that the situation is likely to get worse before it de-escalates.”

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Until something changes with the status of Hormuz, the bias remains for higher oil prices, expected inflation and rates, with that triggering episodes of stock volatility, noted Paul Christopher at Wells Fargo Investment Institute.

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The flare-up in geopolitical tension comes at a time when Wall Street investors are getting ready for the start of the earnings season, with markets growing uneasy over whether the enormous sums being poured into artificial intelligence will pay off.

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“Uncertainty around the Middle East continues, but we think the AI wave is what will drive markets over the next few weeks, especially as earnings season kicks off,” said Sonu Varghese at Carson Group.

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An AI-fueled stock rout in South Korea spilled over into the US market Monday, as SK Hynix Inc. American depositary shares fell 9.3%, underscoring growing investor concerns that the boom is overextended. The selloff on the Kospi index is the latest sign of how volatile the Korean market has become after the AI rally drove massive outperformance versus global peers. 

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The ongoing swings in semiconductor shares has made it difficult for tech to mount a sustained push to the upside while escalating hostilities and rising oil prices won’t help the bullish cause, said Chris Larkin at E*Trade from Morgan Stanley.

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“Headline inflation numbers are expected to cool this week, but the market may not get as much of a boost from good news if traders think oil is headed higher again,” he noted.

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The recent drop in gasoline prices likely helped drag down the consumer price index, with the gauge due Tuesday expected to show its first monthly decline since the onset of the pandemic in 2020. Still, Wednesday’s producer price index could underscore upstream pressures continuing to build. On both days, Kevin Warsh will make his first appearances before Congress as Fed chairman.