Morning Bid: Markets calm as Israel-Iran war rages
The attacks from both sides were far more extensive than the more limited exchanges between the two in recent years, but oil production and export facilities have largely been unaffected so far.
Oil prices fell back after jumping about 7% to 4-month peaks on Friday, with U.S. crude slipping to $72.40 per barrel from last week's high of $77.62. Gold also retreated, having failed to breach April's record last week.
U.S. Treasury yields held Friday's gains, but remain largely stuck in recent ranges as the Federal Reserve meets this week and prepares to release its quarterly economic forecasts. A 20-year bond auction will occur later today.
Wall Street stock futures recovered some of Friday's losses before today's bell, and stocks in Asia and Europe rallied. Middle East bourses, however, continue to fall.
Even as oil analysts and brokers put forward $100-plus forecasts on "worst-case" scenarios, crude remains down 8% year-on-year and still subdued historically, a critical factor for investors focused on the inflationary impact of any new oil shock.
The last time crude topped $100 per barrel was after Russia's full-scale invasion of Ukraine in 2022, but it sustained those heights for less than four months. Prior to that, you have to go back over a decade to see crude hit triple digits.
A key question is whether the conflict will lead to disruptions in the Strait of Hormuz. About a fifth of the world's total oil consumption, or some 18 to 19 million barrels per day of oil, condensate and fuel, passes through the strait.
The possibility of further escalation looms over a meeting of the Group of Seven leaders in Canada, with U.S. President Donald Trump expressing hope on Sunday that a deal could be done. But there is no sign of the fighting abating as we enter the fourth day of war.
As an indication of how far the situation could spiral, two U.S. officials told Reuters that Trump had vetoed an Israeli plan to kill Iran's Supreme Leader Ayatollah Ali Khamenei.
While the G7 talks will likely center on the Middle East conflict, leaders will also discuss lowering the Russian oil cap, with European nations and some others expected to go ahead with the move and further sanctions on Moscow even if Trump objects.
Beyond geopolitics, it's a week jammed with central bank meetings.
There is the Fed, of course, which is not expected to move rates lower until September.
The Bank of Japan started its two-day policy meeting today. The trade and geopolitical uncertainties are widely expected to keep the BOJ on hold too.
Likewise, the Bank of England is expected to stand pat until August.
Perhaps the most notable central bank meeting of this week will involve the Swiss National Bank, which is widely expected to move policy rates back to zero. The likelihood of a cut into negative territory has also risen amid fresh franc strength and domestic price deflation. The franc flirted with its strongest level in more than 10 years against the dollar last week, but held steady on Monday.
Chart of the day
China's new home prices fell in May, extending two years of stagnation, official data showed on Monday, highlighting challenges in the sector despite several rounds of policy support measures. New home prices fell 0.2% month-on-month in May after showing no growth the previous month. From a year earlier, prices fell 3.5% in May. The market entered a prolonged slump in 2021, with debt-laden developers struggling to deliver homes that buyers had already paid for, further denting consumer confidence and hitting the wider economy. Monetary and fiscal supports have been extensive. But even though major cities had shown tentative signs of recovery in recent months, they saw a relapse as well in May, snapping a streak of five consecutive monthly gains.
Today's events to watch
* New York Federal Reserve June manufacturing survey
* G7 summit in Kananaskis, Alberta
* European Central Bank board member Piero Cipollone and Bundesbank President Joachim Nagel speak
* U.S. Treasury sells $13 billion of 20-year bonds
* U.S. corporate earnings: Lennar
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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(By Mike Dolan; Editing by Anna Szymanski)
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