Dollar holds modest gains as Middle East conflict uncertainty persists

NEW YORK – The dollar clung to modest gains against major currencies on Tuesday, as investors’ appetite for riskier assets remained subdued amid evolving developments in the
Middle East conflict.

The dollar, which surged in recent sessions after US-Israeli strikes on Iran sent oil prices soaring, gave up some of those gains after President Donald Trump suggested on Monday the conflict could end sooner than expected.

Trump said the war could end well before the timeline he initially laid out, but threatened to escalate attacks should Tehran block oil shipments from the Strait of Hormuz.

Trump’s comments helped ease concerns, reducing buying pressure on the dollar and sending oil prices down about 15% on Tuesday, a day after they soared to their highest levels since 2022.

“I think this is largely a reflection of the FX complex reacting to the easing in energy prices, which, if prolonged, could lessen the inflationary implications of the current commodity shock, thus lessening some degree of pressure in terms of heavy energy-importer economies,” Michael Brown, senior research strategist at Pepperstone in London, said.

The euro was 0.1% lower on the day at USD 1.16252 after sinking to a more than three-month low of USD 1.1505 in the prior session. The dollar was 0.1% up against the yen at 157.86.

Some strategists warned optimism about a quick resolution may be premature.

“We’re still in a market where almost everything is still tightly correlated to developments in the crude complex, and where participants retain a laser-like focus on incoming geopolitical headlines,” Pepperstone’s Brown said.

Iran’s Revolutionary Guards dismissed Trump’s remarks as “nonsense” and said the blockade would continue until attacks from the US and Israel end.

Meanwhile, G7 energy ministers stopped short of agreeing on a release of strategic oil reserves on Tuesday and instead asked the International Energy Agency to assess the situation before acting.

The pound was 0.1% lower against the dollar at USD 1.34265.

The pound has been pressured by subdued economic data and domestic political turbulence in recent weeks.

With investors’ appetite for riskier assets creeping back, the Australian dollar rose 0.8% while the US currency slipped 0.3% against the Mexican peso.

The Canadian dollar rose about 0.1% to USD 1.3575 on Tuesday, and the yield on benchmark government debt climbed, as the firming risk appetite helped make up for falling crude prices.

“The CAD has appreciated 2% since November, largely a reflection of rising crude oil prices. Despite persistent risks from US tariffs, stronger oil prices should bolster the loonie,” strategists at global macro research and advisory firm Numera Analytics said in a note.

“Our forecast points to appreciation from 1.37 to 1.33 per USD over the next 12 months,” they wrote.

On Tuesday, leading cryptocurrency bitcoin rose 2% to USD 70,382 but remained close to the multi-year low touched in early February.

(Reporting by Niket Nishant and Jiaxing Li; Writing by Jiaxing Li and Tom Westbrook; Editing by Thomas Derpinghaus, Edwina Gibbs, William Maclean, and Andrea Ricci )

Gold gains nearly 2% on softer dollar, cooling inflation concerns

Gold rose nearly 2% on Tuesday, buoyed by a softer dollar and easing inflation concerns as oil prices pulled back amid indications the conflict in the Middle East could end soon.

Spot gold was up 1.9% at USD 5,231.79 per ounce as of 1:31 p.m. ET (1731 GMT). US gold futures for April delivery settled 2.7% higher at USD 5242.10.

The dollar index slipped, supporting gold prices as a weaker dollar makes greenback-priced bullion more affordable for other currency holders.

Oil prices plummeted on Tuesday after soaring to a more than three-year high in the previous session as US President Donald Trump predicted the war in the Middle East could end soon, easing concerns about prolonged disruptions to oil supplies.

On the ground, however, there were no signs of the war easing, with Tehran residents reached by Reuters describing US-Israeli bombardment of the capital overnight as the fiercest of the conflict.

“With oil prices easing from peaks above USD 100 – still inflationary and therefore supportive for gold, but no longer high enough to seriously limit the Fed’s ability to cut rates – investors are gaining comfort that the debasement trade may be re-energizing as we move on,” said Bart Melek, global head of commodity strategy at TD Securities.

Despite being viewed as an inflation hedge, gold loses some appeal when interest rates rise, as it offers no yield.

Investors also await US consumer price index data and Personal Consumption Expenditures (PCE) data due later this week. The Federal Reserve is expected to hold rates steady at its upcoming March 17-18 meeting.

Meanwhile, gold in Dubai is trading at a discount to London as flight constraints caused by the conflict keep more bullion in the local market, while demand remains subdued.

Spot silver rose 2.7% to USD 89.39. Spot platinum gained 2.2% at USD 2,229.15, while palladium fell 0.9% to USD 1,675.50.

(Reporting by Ashitha Shivaprasad in Bengaluru; Editing by Jonathan Ananda and Krishna Chandra Eluri)

Portfolio flows to emerging markets slow to USD 22 billion in February, says IIF

NEW YORK – Foreign investors sharply slowed their purchases of emerging market assets in February to below USD 22 billion even as flows remained positive across both debt and equities, data from a global banking trade group showed on Tuesday.

Non-resident investors added a net USD 21.7 billion to emerging market portfolios last month, a sharp decline from January’s record USD 100.5 billion and below the USD 45.5 billion recorded in February last year, the Institute of International Finance said.

The slowdown followed an unusually strong start to the year rather than a more fundamental shift in investor appetite, said Jonathan Fortun, senior economist at the IIF.

“The month-to-month slowdown is … best read as a normalization after an outlier January print,” he said in the IIF report.

Foreign investors allocated a net USD 14.3 billion to emerging market debt last month, while equity inflows slowed to USD 7.4 billion from USD 28.0 billion in January.

The February data predates a deterioration in global risk sentiment triggered by the US-Israeli war on Iran whose spread in the Middle East has prompted a retreat from emerging markets and other risk assets in the first days of March.

South Korea, which the IIF highlighted as an area of weakness in February flows, has since seen particularly steep equity losses even though the benchmark KOSPI remains strong on a year-to-date basis.

ASIA LEADS FEBRUARY DEBT INFLOWS

Debt inflows in February were spread across regions. Asia drew USD 5.9 billion, followed by Latin America with USD 4.3 billion, emerging Europe with USD 2.6 billion and the Middle East and North Africa with USD 1.5 billion.

China’s debt market attracted USD 400 million in February after stronger inflows in January, while emerging markets outside China received USD 13.8 billion.

The IIF said that pattern suggests investors remain interested in higher-yielding markets outside China, even as conditions in global markets become less predictable.

Equity flows also stayed positive last month, although the regional picture was uneven.

China stocks sucked in USD 5.2 billion while emerging markets outside China added USD 2.2 billion. Across regions, Latin America led allocations with USD 6.9 billion, while emerging Europe, the Middle East, and North Africa also saw smaller inflows.

Asia equities overall recorded net outflows as selling in markets such as South Korea offset inflows elsewhere.

“In this environment, flows are likely to remain broadly resilient but increasingly differentiated, with balance sheet strength, policy credibility, and market depth playing a growing role in shaping investor allocation decisions,” Fortun said.

Local currency bond markets continued to attract buyers as investors sought relatively high yields in countries where exchange rates and policy settings have remained broadly stable. A weaker dollar earlier in the year has also helped support returns across both local- and foreign-currency debt.

Even with steady inflows, February also showed that investors remain selective in how they allocate capital across emerging markets, the IIF said.

Late last month, Indonesia experienced a sharp bout of outflows from both equities and sovereign bonds after domestic market concerns. The IIF said the episode remained localized and did not spread across other emerging market assets.

(Reporting by Rodrigo Campos in New York, editing by Karin Strohecker and Alexander Smith)

Stocks set for tough week, oil eyes big gains as Middle East war rages

SINGAPORE – Asia stocks fell on Friday and were headed for their sharpest weekly drop in six years while oil prices were poised for their biggest jump in three in a turbulent week for global markets as the conflict in the Middle East showed few signs of easing.

Investors sought the safety of cash as they sobered up to the fact that the US-Israel war on Iran could drag on longer than initially anticipated.

They also moved to price in more hawkish rate expectations from major central banks, spooked by the prospect of a resurgence in inflation if the spike in energy prices persists.

Yields on US Treasuries have shot up some 18 basis points this week, their most in nearly a year, while the dollar was set for its largest weekly gain in 16 months.

“The range of plausible outcomes (of the war) has expanded to include both the possibility of an exceptionally constructive resolution and a highly destructive one,” said Daleep Singh, chief global economist at PGIM Fixed Income.

“Markets are being asked to price a much fatter set of tails with very little reliable information about the likelihood of each, or the path in between.”

The war has thus far had the biggest impact on oil prices, with Brent crude futures now trading around USD 83 per barrel, having been as low as USD 69 just about a week ago. US crude shot up to a 20-month high earlier this week.

Both are set to clock a rise of more than 15% for the week, their largest since February 2022.

“The most market-relevant risk lies in severe escalation or direct infrastructure damage across key Gulf producers, which would likely produce sustained upward pressure on oil, feed into higher headline inflation, tighten global liquidity, and materially raise recession risks,” said Klay Group’s senior investment team.

HIGH-FLYING STOCKS TUMBLE

MSCI’s broadest index of Asia-Pacific shares outside Japan last traded 0.4% lower and was set to fall 6.6% for the week, which would mark its steepest weekly drop since March 2020.

Japan’s Nikkei was down 0.5% and on track for a 6.5% weekly loss, while South Korea’s Kospi was also headed for its largest weekly fall in six years with a 10.5% slide.

The market rout this week sent even high-flying technology stocks and indexes such as the Kospi tumbling, as investors scrambled to book profits to cover losses elsewhere.

“When the dollar rallies and US yields rise, funding conditions are tightening, which will often exacerbate broader moves particularly if there’s leverage involved,” said Ben Bennett, head of Asia investment strategy at L&G Asset Management.

US stock futures were steady in Asia on Friday, while EUROSTOXX 50 futures rose 0.6% and DAX futures added 0.5%.

DOLLAR IS KING

The dollar has emerged as one of few winners this week in volatile sessions that have dragged stocks, bonds and, at times, even safe-haven precious metals lower.

The rally in the dollar hit pause on Friday, but it was still on track for a 1.4% weekly gain, bolstered by safe-haven demand and reduced US rate-easing expectations.

The euro, which remains vulnerable to a spike in energy prices, was set to fall 1.7% for the week, while sterling was similarly headed for a 0.95% weekly drop.

Investors are now pricing in about 40 basis points worth of easing from the Federal Reserve this year, down from 56 bps a week ago, while odds for a rate cut from the Bank of England this month have fallen to 23% from a near certainty just last week.

The European Central Bank is seen hiking rates by year-end.

The shifting rate expectations have, in turn, pushed up global bond yields, and in Asia on Friday, the yield on the benchmark 10-year US Treasury was steady at 4.1421%, having risen some 18 bps this week.

The two-year yield has jumped 20 bps for the week.

Elsewhere, spot gold was steady at USD 5,078.88 an ounce, though it was headed for a 3.7% weekly fall as rising yields and a stronger dollar eclipsed the yellow metal’s safe-haven appeal.

(Reporting by Rae Wee; Editing by Muralikumar Anantharaman)

Dollar set for steepest weekly gain in a year as Iran crisis boosts haven bid

TOKYO – The US dollar held broadly steady in early Asian trade on Friday and was poised for its steepest weekly gain in more than a year as the escalating conflict in the Middle East drove demand for safe-haven assets.

The euro and yen remained on the back foot as the crisis drove oil prices ever higher, spurring inflation risks in economies dependent on energy imports and upending expectations for policy by the Federal Reserve and other central banks.

Earlier hopes of a de-escalation gave way to fresh uncertainty, with Iran warning that Washington would “bitterly regret” the sinking of an Iranian warship. US President Donald Trump said he wanted to be involved in choosing Iran’s next head of state after US and Israeli air strikes killed Supreme Leader Ali Khamenei in the early moments of the war.

“If the Middle Eastern conflict continues at its current intensity, it’s likely to bring sustained higher inflation, a stronger US dollar, and a vastly reduced chance of Fed rate cuts,” IG market analyst Tony Sycamore wrote in a note.

The dollar index, which measures the greenback against a basket of currencies, was trading a touch lower by 0.06% at 99.00, still on course for a 1.4% gain this week that would be the most since November 2024.

The euro was little changed at USD 1.1612, while the yen tacked on 0.06% to 157.5 per dollar. Sterling was almost steady, up just 0.04% at USD 1.3361.

The war escalated on Thursday, with US and Israeli jets hitting areas across Iran and Gulf cities coming under renewed bombardment.

In a phone interview with Reuters, Trump said Mojtaba Khamenei, a son of the late supreme leader who has been considered a favorite to succeed his father, was an unlikely choice.

The greenback was one of a handful of winners in a volatile few sessions that have dragged stocks, bonds and, at times, even safe-haven precious metals lower.

The spike in energy prices from the Middle East war has stoked fears of a resurgence in inflation, with overnight index swaps (OIS) showing shifts in rate outlooks for major central banks.

Traders have pushed back the time frame for the next easing by the Fed to either September or October, according to LSEG estimates. Rate-easing expectations from the Bank of England have also been pared back, while money markets increased bets on European Central Bank rate hikes as early as this year.

“The fears of what happened to inflation when the Russia-Ukraine war began and what we saw post-pandemic with supply shocks, that’s still sort of front of mind,” Skye Masters, head of markets research at National Australia Bank, said on a podcast. “You see that repricing in OIS curves, and you are seeing some meaningful repricing in bond markets as well.”

With the war in focus, currency investors shrugged off Thursday’s economic data.

The number of Americans filing new applications for unemployment benefits was unchanged last week, while layoffs dropped sharply in February, consistent with stable labor market conditions.

The market is now focused on Friday’s employment report. Nonfarm payrolls likely increased by 59,000 jobs last month after accelerating by 130,000 in January, a Reuters survey of economists predicted. The unemployment rate is expected to have held steady at 4.3%.

TD Securities head of FX strategy Jayati Bharadwaj said she sees room for short‑term adjustment in long dollar positioning given the current risk‑off tone. But she expects the Iran conflict to remain contained, especially in a US midterm election year.

“(The) US dollar upside should persist only while risk premia remain elevated in crude oil, potentially echoing the price action seen in June 2025 until a regime shift happens in Iran with US backing,” Bharadwaj said in a note.

The Australian dollar strengthened 0.16% versus the greenback to USD 0.7017. The kiwi rose 0.15% to USD 0.5903.

In cryptocurrencies, bitcoin fell 0.26% to USD 70,956.52, and ether declined 0.27% to USD 2,074.84.

(Reporting by Rocky Swift; Editing by Shri Navaratnam)

Oil settles up around 5% on supply concerns as Iran conflict widens

HOUSTON – Oil prices rallied on Thursday on growing disruption to global oil supplies caused by the US-Israeli war with Iran, with US futures prices rising faster than the international benchmark Brent futures as Washington said it may take action in the futures market to combat rising energy prices.

US West Texas Intermediate crude settled up USD 6.35, or 8.51%, to USD 81.01, its highest since July 2024. Brent crude settled up USD 4.01, or 4.93%, at USD 85.41 per barrel, a fifth session of gains.

The divergence between the two benchmarks was most pronounced around 1500 ET. The two contracts typically trade in lockstep unless there is a specific change impacting supply or demand relevant to one of the benchmarks.

The US Treasury Department may take action in the oil futures market as part of measures to combat rising energy prices expected to be announced as soon as Thursday, a senior White House official said.

President Donald Trump said on Thursday he was not concerned about rising US gas prices driven by the widening Iran conflict, telling Reuters in an exclusive interview that the US military operation was his priority. Trump also said that the United States wanted to be involved in choosing Iran’s next leader.

Iraq and Qatar have already shut in oil and gas production due to the shipping paralysis through the Strait of Hormuz. Iraq shut down nearly 1.5 million barrels per day of crude production because it is running out of storage for the oil it produces without oil tankers to take it away. Qatar has shut down its production of liquefied natural gas (LNG) for the same reason LNG tankers cannot traverse the Hormuz shipping chokepoint. Kuwait and the UAE could be next to cut supply as storage space runs out, according to analysts, traders and sources.

“There is no movement in the Strait of Hormuz so prices will grind higher, and with countries having to shut in production then we will be delayed even longer because it is not like you can just resume production at full strength, that will be a problem for a while,” said John Kilduff, partner at Again Capital.

Around a fifth of global oil flows through the Strait.

Dennis Kissler, senior vice president of trading at BOK Financial, said “… if this persists into next week, the eventual re-starting of production and re-vamping of shipping once the Strait is re-opened will also take time to get back online.”

CONTINUED ATTACKS ON OIL TANKERS

Attacks on oil tankers continued on Thursday in the Gulf, as the Bahamas-flagged crude oil tanker Sonangol Namibe reported its hull was breached after a blast near Iraq’s port of Khor al Zubair.

Those attacks, along with Chinese measures to reduce fuel exports, pushed prices higher, said UBS analyst Giovanni Staunovo. The refined product market is also showing signs of stress due to missing Middle East exports, he added.

Some oil refineries in the Middle East, China and India shut their crude units because of the conflict in the Middle East.

As a result of a lower supply outlook in fuel markets, US diesel futures HOc1 jumped 10%, reaching just over USD 3.60 a gallon during the session.

Around 300 oil tankers remained inside the Strait of Hormuz after vessel traffic in and out of the chokepoint nearly halted following the outbreak of war, according to ship tracking data from Vortexa and Kpler that excludes some of the smallest tankers.

(Reporting by Georgina McCartney in Houston, Enes Tunagur in London, Katya Golubkova in Tokyo, and Siyi Liu in Singapore; Additional reporting by Stephanie Kelly in London; Editing by Andrei Khalip, Kirsten Donovan, David Gregorio, and Stephen Coates)

Japan’s Nikkei rebounds 3.9% as investors seek relief from Mideast conflict

TOKYO – Japanese shares rose sharply on Thursday as investors sought relief after a three-day losing streak sparked by the Middle East conflict, with sentiment bolstered by Wall Street’s overnight gains.

The Nikkei 225 Index rose 3.9% to 56,356.54, as of 0026 GMT on Thursday. The broader Topix climbed 3.7% to 3,769.39.

The Nikkei fell to a one-month low on Wednesday, as part of a broader selloff in Asian equities, with investors selling risk assets amid the Middle East conflict and booking profits after record highs. The benchmark index shed 7.8% over the three sessions to Wednesday.

There were 221 advancers on the Nikkei index and four decliners.

(Reporting by Satoshi Sugiyama; Editing by Rashmi Aich)

US stocks close up on Iran diplomacy hopes; tech leads rebound

US stocks closed up on Wednesday, after a news report that Iran had signaled openness to talks and a pledge by President Donald Trump to steady oil markets calmed investor anxiety about the Mideast clash.

Investors flocked again to tech shares, lifting the Nasdaq by 1.29% and keeping the tech‑heavy index in positive territory since the US-Israeli strike on Iran, which ignited the conflict in the Middle East. The S&P 500 remained close to its all-time closing high, in January, also helped by positive reports on the US economy.

A New York Times report said Iranian intelligence operatives indirectly reached out to the CIA a day after the attacks, but US officials remain skeptical that either the Trump administration or Iran is prepared for a near-term de-escalation. Trump’s announcements of a US naval escort for oil tankers through the Strait of Hormuz and political risk insurance also brought some relief.

The White House announcement reduced fears of major disruptions in the oil market, which could lift energy prices and pressure inflation, said Jim Awad, senior managing director at Clearstead Advisors LLC in New York. The relief gave investors confidence to scoop up tech-related stocks that sold off heavily in February and were cheap compared with weeks ago, he said.

“That combination is giving the market some optimism, which will be tested over the coming weeks,” Awad said. “It is time to be realistic and not get carried away, either too bullishly or too bearishly.”

The Dow Jones Industrial Average rose 238.14 points, or 0.49%, to 48,739.41, the S&P 500 gained 52.87 points, or 0.78%, to 6,869.50, and the Nasdaq Composite gained 290.79 points, or 1.29%, to 22,807.48.

The prospect of the war spurring additional inflation is one of the main reasons for market volatility on the horizon, said Richard Bernstein, chief executive officer of Richard Bernstein Advisors.

“If people think the war will be short-lived or ‘not an issue’ for the US economy, then the stock market will likely rally,” he said. “The opposite seems true, too. Long-lived and impacting the US economy could mean more volatility.”

The VIX — Wall Street’s “fear gauge,” which tracks expected stock‑market volatility — slipped to around 21, down roughly 10% on the day, signaling that traders were pricing in less near‑term turbulence despite the conflict.

Since the airstrikes over the weekend, the Nasdaq has risen 0.61%, and the small‑cap Russell 2000 is up 0.42%. The S&P 500 is down 0.14% and the Dow has fallen 0.49% this week.

The energy sector led declines on the S&P 500 on Wednesday as stocks that had climbed in recent days on rising oil-price fears reversed course. Exxon Mobil closed down 1.3%, and ConocoPhillips slipped 2.42%.

Several Middle Eastern countries have temporarily halted oil and gas production, and the US was looking to expand its campaign inside Iran.

Oil prices settled unchanged on Wednesday at the end of a volatile trading session. Brent crude settled at USD 81.40 per barrel, flat to Tuesday’s close and at its highest level since January 2025.

US economic activity rose a bit, prices continued to increase, and employment levels were stable in recent weeks, the Federal Reserve said on Wednesday in a report, which also showed economic expectations were optimistic.

Meanwhile, a private survey showed private payrolls increased more than expected in February, while a separate report pointed to strong services activity.

Drugmaker Moderna added 16% after agreeing to pay up to USD 2.25 billion to settle a long-running legal fight over a COVID-19 vaccine patent.

(Reporting by Sabrina Valle in New York; Additional reporting by Johann M Cherian, Ragini Mathur and Pranav Kashyap in Bengaluru; Editing by Maju Samuel and Matthew Lewis)

Gold rises as Middle East conflict escalates, dollar rally pauses

Gold prices rose on Wednesday as the escalating conflict in the Middle East attracted safe‑haven bids, while a pause in the US dollar’s rally also lent support.

Spot gold was up 0.7% at USD 5,120.71 per ounce by 1831 GMT, after falling more than 4% on Tuesday.

US gold futures for April delivery settled 0.2% higher at USD 5,134.70.

“The dollar has seen a pullback, which is providing some support. Overall, the macro-fundamental factors remain broadly supportive of gold. Certainly, as long as the war with Iran is ongoing, that’s going to remain supportive as well,” said Peter Grant, vice president and senior metals strategist at Zaner Metals.

“There is risk that volatility continues. But I remain bullish and think we will see new all-time highs.”

The dollar eased after sharp gains on Tuesday. A softer dollar makes greenback-priced gold less expensive for holders of other currencies.

The US–Iran war widened sharply after a US submarine sank an Iranian warship off Sri Lanka, killing at least 80 people, and NATO air defences destroyed an Iranian ballistic missile fired towards Turkey.

Gold, a non-yielding asset that is considered a hedge against uncertainty and inflation, tends to be preferred during periods of low interest rates.

The ADP’s national employment report showed US private payrolls increased more than expected in February, though data for the prior month was revised sharply lower.

Investors are turning their attention to the release on Friday of the US employment report for February. Nonfarm payrolls likely increased by 59,000 jobs last month after accelerating by 130,000 in January, a Reuters survey of economists predicted.

Spot silver firmed 1.3% to USD 83.07 per ounce after falling more than 8% in the previous session.

Spot platinum added 2.8% to USD 2,141.71 while palladium rose 1.2% to USD 1,667.51.

The World Platinum Investment Council said the global platinum market is heading for its fourth consecutive annual deficit in 2026.

(Reporting by Ashitha Shivaprasad in Bengaluru; Editing by Paul Simao and Krishna Chandra Eluri)

Investors brace for energy shock, inflation fears from prolonged Iran conflict

NEW YORK – Investors are starting to brace for a prolonged Middle East conflict that could stoke fresh inflation fears, threaten economic growth and undermine the case for interest-rate cuts in the coming months.

While whipsawed global markets found steadier ground on Wednesday, after the previous day’s sharp selling, inflation worries remain at the top of the worry list.

Disruption to the Strait of Hormuz – a chokepoint that carries roughly one-fifth of the world’s oil supply – has raised the risk of an energy-driven inflation surge.

“The reality is setting in that a prolonged conflict could dampen global growth and re‑ignite inflation pressures,” said Joseph Tanious, chief investment strategist at Northern Trust Asset Management in San Diego.

SOUTH KOREAN MARKET TUMBLES AMID OIL SPIKE

Oil prices jumped for a third straight day on Wednesday, although US stock futures ESc1 pointed to a positive open and European shares rallied.

Energy import-dependent countries such as South Korea have also been hit hard, with South Korea’s KOSPI benchmark closing down 12% on Wednesday, its largest drop on record.

The S&P 500 briefly hit its lowest level in more than three months on Tuesday and all 11 of the index’s sectors declined, indicating a broad selloff.

Global government bonds have weakened this week, with US 10-year Treasury yields 2.5 basis points higher on Wednesday at around 4.08%.

The Cboe Volatility Index, Wall Street’s “fear gauge”, also hit its highest level in more than three months.

“The reaction has become more intense… there’s no sign of a quick resolution,” said Que Nguyen, chief investment officer of equity strategies at Research Affiliates in Newport Beach, California. “People are waking up to the fact that this is a lot more complicated than they assumed.”

INFLATION BACK TO THE FORE

Investors zeroed in on the potential pressure on inflation stemming from a sustained rise in oil prices. Brent crude was last near USD 83 a barrel, up from around USD 60 at the start of the year.

The five-year US breakeven inflation – a market-based measure of inflation expectations – is trading at around 2.51%, the highest in almost a month.

Goldman Sachs economists estimate that a sustained 10% increase in oil prices boosts the consumer price index – a closely watched inflation measure – by 28 basis points.

No wonder Wall Street has tempered its expectations for US interest-rate cuts.

Fed Funds futures on Wednesday indicated a roughly 43% chance the Federal Reserve would cut rates by June, after markets had priced in a greater than 50% chance of a cut by that meeting as of late last month.

“The biggest issue that (investors) are trying to weigh gets back to the intertwining of inflation and interest rates,” said Chuck Carlson, chief executive officer at Horizon Investment Services.

Gauges of European inflation have also nudged higher, and notably, markets have moved to start pricing in the chance of a European Central Bank rate hike by year-end.

“We’re multi-asset investors and the worst nightmare for a multi-asset investor is that your bonds and equities move in the same direction,” said Justin Onuekwusi, chief investment officer at St. James’s Place in London.

“When they move in the same direction, it’s when you have inflation fears and inflation expectations rise significantly.”

Other geopolitical volatility involving the United States, such as situations with Venezuela and Greenland, have failed to significantly undermine stocks. Some investors were already eyeing any weakness from the Iran conflict as a possible buying opportunity.

“We are taking cash we raised from tech to aggressively get more positioned for a global acceleration of economic growth,” said Eddie Ghabour, CEO of Key Advisors Wealth Management, whose firm has been buying emerging markets ETFs this week.

Despite the declines this week, the S&P 500 remained only slightly more than 2% from its all-time closing high.

Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management, said the market’s resiliency “suggests to me that investors might be underestimating the geopolitical risk”.

(Reporting by Laura Matthews and Lewis Krauskopf in New York; additional reporting by Suzanne McGee, Saeed Azhar, Gertrude Chavez-Dreyfuss, Stephen Culp and Dhara Ranasinghe; editing by Megan Davies and Alex Richardson)

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