Staff writers
The Australian sharemarket will be the first major bourse to react to the US and Iran’s failure to strike a peace deal over the weekend, which is expected to weigh on investor sentiment, send oil prices higher again and lift demand for safe haven assets on Monday, according to analysts.
Donald Trump vowed to blockade the Strait of Hormuz after the collapsed talks, adding further pressure to oil markets. The move could increase tensions with China, Iran’s main buyer, by choking off the remaining trickle of shipments that have continued to move through the waterway.
While ASX futures were up 70 points, or 0.8 per cent, suggesting the local bourse could climb back above the 9000 mark for the first time since the start of the war, investor sentiment will be as fragile as the ceasefire in the Persian Gulf, market experts said. The Australian dollar fell 1.2 per cent to US69.77¢ as of 6.46am AEST.
The ASX dipped 0.1 per cent on Friday, but held on to most of its gains from earlier in the week as investors remained cautiously optimistic about the fragile ceasefire in the Middle East.
“The key question for Monday is whether markets interpret this as a temporary breakdown in negotiations or a structural collapse of the ceasefire framework,” said Kyle Rodda, a market analyst at Capital.com.
Elias Haddad, global head of markets strategy at Wall Street investment firm Brown Brothers Harriman & Co, predicted that “Trump’s move to announce a naval blockade of the Strait of Hormuz is set to reignite risk aversion this week.
“Crude oil prices are likely to retrace some of last week’s ceasefire-induced decline, while the potential for an increase in tensions with China, a significant buyer of Iranian oil, can add to market unease.”
Oil futures eased on Friday ahead of the US-Iran talks but still ended last week 30 per cent above where they were before the war, while traders are paying record amounts north of $US140 a barrel for some real-world cargoes as they scramble for supplies.
Trump said the US will begin a full naval blockade of the strategic Strait of Hormuz and threatened to retaliate in the event of Iranian resistance, escalating a standoff that has already brought the waterway to a near standstill and disrupted global energy supplies.
The president’s announcement came hours after the US and Iran failed to reach a deal in direct talks in Pakistan, jeopardising hopes of turning a fragile ceasefire into a lasting end to a war that has claimed thousands of lives. The negotiations collapsed because of differences over the nuclear issue, Trump said in a Truth Social posting on Sunday.
“Effective immediately, the United States Navy, the Finest in the World, will begin the process of BLOCKADING any and all Ships trying to enter, or leave, the Strait of Hormuz,” he said. “Any Iranian who fires at us, or at peaceful vessels, will be BLOWN TO HELL!”
The failure of the US and Iran to reach a peace deal, along with Trump’s threats, leaves the ceasefire clinched last week in limbo. Trump said the US will interdict any vessel that has paid a toll to Iran for safe passage through Hormuz and will clear mines in the strait, through which about a fifth of global oil and liquefied natural gas flowed before the war.
“I would think we will see oil open higher alongside the dollar on Monday due to risk-off. Stocks are expected to take a significant hit and yields to push higher,” said Nick Twidale, chief market analyst at AT Global Markets Australia.
On Wall Street, the S&P 500 inched 0.1 per cent lower on Friday after a day of choppy trading as investors were waiting for the outcome of the peace talks over the weekend. The Dow Jones Industrial Average fell 0.6 per cent and the Nasdaq composite rose 0.4 per cent.
The major indexes each notched a weekly gain for the second week in a row. They have been gaining ground this month amid optimism that the war with Iran could be heading toward a resolution with the high-level talks between negotiators from Iran and the US on Sunday.
The benchmark S&P 500 has erased most of its losses from March and is just 2.3 per cent short of its all-time high set in January. The market is still prone to big swings on developments around the war.
Oil prices have been behind many of the stock market’s sharp movements. They’ve risen sharply as shipping through the vital Strait of Hormuz essentially stalled since the war began.
Brent crude oil, the international standard, has gone from roughly $US70 per barrel before the war in late February to more than $US119 at times. Brent for June delivery fell 0.8 per cent to $US95.20 per barrel on Friday. A barrel of US crude oil for May delivery dropped 1.3 per cent to $US96.57.
The war in the Middle East was behind surging inflation in the US in March. The government reported the biggest spike in inflation in four years as prices at the petrol bowser jumped. The inflation increase was just short of what economists expected.
Bond yields rose a bit following the latest inflation update. The yield on the 10-year Treasury climbed to 4.32 per cent on Friday from 4.29 per cent late Thursday.
Inflation has been a lingering concern for economists. Prices on a range of consumer goods and services are already stubbornly high, in part from the impact of extensive global tariffs. Higher gas prices are immediately felt by drivers at the pump, but they could eventually raise prices on everything from food to airfare as companies pass along higher costs for shipping and fuel.
US consumer sentiment slumped 10.7 per cent in April, according to a closely watched monthly survey from the University of Michigan. It also shows that consumers are growing more worried about inflation, with year-ahead expectations surging to 4.8 per cent in April from 3.8 per cent in March.
Inflation remains a major concern for the Federal Reserve, which has signalled more caution amid worries about inflation reheating. The rate of inflation remains above the central bank’s 2 per cent target. The threat of rising inflation will likely mean the central bank continues to hold interest rates steady. Several Fed officials have also said a rate hike may be needed if inflation doesn’t cool.
Lower interest rates help boost stocks and other investments by lowering borrowing costs. Interest rate cuts also risk worsening inflation.
Most companies in the S&P 500 lost ground on Friday, with health care and financial company stocks driving much of the decline. Eli Lilly fell 1.6 per cent and Charles Schwab closed 2.5 per cent lower. Technology stocks with hefty values helped offset losses elsewhere. Nvidia rose 2.6 per cent and Broadcom rose 4.7 per cent.
In other international markets, markets in Asia gained ground while markets in Europe were mixed.
with Bloomberg, AP
