Asia Stocks Slump as Markets Brace for Energy Shock

US, European stocks rise as oil takes a pause and crypto rallies

Market Overview and Key Drivers

By Sinéad Carew and Alun John

NEW YORK/LONDON, March 4 (Reuters) - U.S. and European equities rose on Wednesday as oil prices took a breather after their dramatic two-day rally and a surge in cryptocurrencies encouraged investors to take on risk while cautiously monitoring the Middle East war.

Geopolitical Tensions and Market Sentiment

The dollar fell and U.S. Treasury yields rose for a third straight day, even as the U.S.–Iran war expanded after a U.S. submarine sank an Iranian warship off Sri Lanka, killing at least 80 people. Also, NATO air defences destroyed an Iranian ballistic missile fired towards Turkey.

In early trading, some assets gained support after the New York Times reported that operatives from Iran’s Ministry of Intelligence reached out indirectly to the CIA the day after U.S. and Israeli attacks on Iran began, with an offer to discuss terms for ending the conflict. On Tuesday Iran's ambassador to the United Nations in Geneva ruled out for now any negotiations with the U.S.

Investor Reactions

"Investors are seeing light at the end of the tunnel for the conflict in the Middle East and are unwinding short positions on the currencies most exposed to a sustained commodity-price shock," said Karl Schamotta, chief market strategist at Corpay in Toronto.

Stock Market Performance

US Equities

U.S. stock traders were encouraged by a dip in oil prices and a rally in bitcoin along with gains in the semiconductor sector and recently battered software stocks, according to Michael James, equity sales trader at Rosenblatt Securities.

"You combine all of those and it equates to a market that's feeling further emboldened," said James.

"The fact the stock market has rallied impressively off two gap-down lows Monday and Tuesday morning, and recovered meaningfully, gave some added conviction to the bulls," James said.

Major Indices

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

MSCI's gauge of stocks across the globe rose 1.81 points, or 0.18%, to 1,031.59. Earlier, the pan-European STOXX 600 index closed up 1.4%, erasing some of Tuesday's losses. 

Asian Markets

In Asia, South Korea's KOSPI benchmark closed down 12%, its third straight daily decline. South Korea relies heavily on Middle Eastern oil. [.KS]  Japan's Nikkei fell 3.6% and Taiwan stocks dropped 4.3%.

Cryptocurrency Rally

In cryptocurrencies, bitcoin rallied 7.64% to $73,245.38. Ethereum rose 9.23% to $2,150.48.

Currency and Bond Markets

Currency Movements

In currencies, the U.S. dollar eased off the previous session's multi‑month highs, as investors unwound safe‑haven positions on rising hopes for a shorter the Middle East.

The dollar index, which measures the greenback against a basket of currencies including the yen and euro, fell 0.31% to 98.77. The euro rose 0.22% to $1.1638. Against the Japanese yen, the dollar weakened 0.43% to 157.03 while sterling pared gains and was last up 0.16% at $1.3375.

Bond Yields

U.S. Treasury yields advanced as investors gauged the likely path of monetary policy after the war in Iran pushed up oil prices.

"The things that we would watch for are if rates move lower, it's probably not a positive perspective for the broad economy. If they move materially higher, it's likely an unanchoring of inflation expectations based on things that are happening in the hydrocarbon market," said Bill Northey, senior investment director at U.S. Bank Wealth Management.

The yield on benchmark U.S. 10-year notes rose 4.1 basis points from late Tuesday to 4.098%. The 30-year bond yield  rose 2.9 basis points to 4.7322%.

The 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, rose 5.1 basis points to 3.551%.

Commodities and Precious Metals

Oil Prices

The rally in oil prices stalled even as the escalating conflict paralysed shipping through the Strait of Hormuz, disrupting oil shipping for a fifth day.

U.S. crude settled up 0.13%, or 10 cents, at $74.66 a barrel and Brent settled unchanged at $81.40 per barrel.

Gold and Silver

Trading in precious metals was boosted by the dollar's decline and a search for other safe-haven assets during the war.

Spot gold rose 0.99% to $5,136.91 an ounce after falling 4.5% on Tuesday. Spot silver rose 1.65% to $83.39 an ounce after falling in the two last sessions.

Reporting Credits

(Reporting by Tom Westbrook and Rae Wee in Singapore, Alun John in London, Sinéad Carew and Gretrude Chavey-Dreyfuss in New York; Editing by Jacqueline Wong, Hugh Lawson, Will Dunham, William Maclean and David Gregorio)