Stocks, bonds retreat after Trump says Iran MOU 'is over'
Market Reactions and Expert Analysis
LONDON/NEW YORK, July 8 (Reuters) - Oil surged and stocks and bonds dropped on Wednesday, after U.S. President Donald Trump said the memorandum of understanding that provided a framework for the ceasefire with Iran "was over" after the two sides traded attacks overnight.
Trump spoke in Ankara at a NATO summit in the Turkish capital. Oil prices rose 5% to $78 a barrel and European stocks dropped 1.1%, while the dollar jumped and government bond yields rose. U.S. stocks were lower, with the Nasdaq down 0.8%.
Market Commentaries
COMMENTS:
ROB HAWORTH, SENIOR INVESTMENT STRATEGIST, U.S. BANK WEALTH MANAGEMENT, SEATTLE:
Market Perspective on Oil and Conflict Duration
"The market has learned at this point to look through, because it doesn't seem like there's a willingness to stay with the conflict for longer by this administration, even though the threats are meaningful. With attacks and that comment that the ceasefire is over, it seems like we should see more pressure, but just thinking through this on oil, the lows during the conflict were like in the $78 to $82 region for WTI, and we're not even above $75 yet.
"And so I think that's kind of the signal point to us that the market is having to take this conflict more seriously is if we start to exceed those levels. Duration is the key here - how long does this go on? Do we actually strike Iranian infrastructure?
"If we see damage to Iranian infrastructure, the market may have to respond more seriously to that because there's likely Iranian retaliation. And they've had success at shutting down shipping using their, with the Revolutionary Guard, using their speedboats and mines to kind of reassert the threats in the Strait."
JACK JANASIEWICZ, LEAD PORTFOLIO STRATEGIST, NATIXIS INVESTMENT MANAGERS, BOSTON:
Market Resilience and Risk Perception
“I think it's now taken a backseat. I think you have to then start thinking about a full ground invasion sort of thing to really alter the perception of the market. Because we've already been there with the kinetic war, just lobbing missiles at each other, and the market really held up pretty well against that backdrop. It's been going on for long enough where I just think it's now a backstory. The market's really not focusing on it that much.
“Obviously, the risk is if oil prices continue to climb back up, but I think we've sort of gotten comfortable with the backdrop here that the worst-case scenario is going to be avoided at all costs. We'll get some of these interim blips along the way, but that worst-case scenario that I outlined, there's a low probability of that. That’s really what the market was thinking all along anyway. And that's why the market held up and was pretty resilient over that time. So, I don't think this changes that backdrop or anything."
BRUCE ZARO, MANAGING DIRECTOR, GRANITE WEALTH MANAGEMENT, PLYMOUTH, MASSACHUSETTS:
Oil Price Trends and Market Response
"What is interesting to me is the action of oil prices. Oil prices have been on a downward trend... With OPEC coming in and adding more oil to the market, the potential for oil is to go lower and that really takes one of the biggest worries off the table... When I hear that the ceasefire is off, I think it's a more muted reaction than the market would have put on than even just maybe four weeks ago, six weeks ago, eight weeks ago."
ANGELO KOURKAFAS, SENIOR GLOBAL STRATEGIST, INVESTMENT STRATEGY, EDWARD JONES, ST. LOUIS, MISSOURI:
Geopolitical Risks and Economic Outlook
“The spike in oil prices and higher bond yields helped drive a near 10% correction in the first half of the year, but they also underscored the economy’s resilience to these shocks. Renewed geopolitical risks may fuel some near-term risk-off sentiment, but we do not expect investors to react to this round of uncertainty in the same way, for several reasons.
"First, neither the U.S. nor Iran appears inclined toward a prolonged conflict, in our view, and investors have already seen how reacting to fast-moving headlines can lead to suboptimal portfolio outcomes. Second, we think it would likely take a much larger and sustained rise in oil prices to materially alter the outlook for the economy and corporate earnings. Finally, oil supplies have begun to recover, providing a renewed buffer for energy markets, while the improving labor market helps support household incomes—even as the tailwind from higher tax refunds fades.”
IAN LYNGEN, HEAD OF U.S. RATES STRATEGY, BMO CAPITAL MARKETS, NEW YORK:
Impact on Economic Data and Fed Policy
“In practical terms, the potential reset on the war in Iran implies that the near-term economic data is less relevant – at least on the margin. June’s core inflation figures will be downplayed in the event that crude oil continues to march higher throughout the month of July. What had been a downward influence on headline inflation (and potential pass-through to core) appears to be reverting to an upside risk.
“Putting this in the context of this afternoon’s FOMC Minutes, the official update will now appear somewhat stale given that the Middle East conflict no longer appears to be resolved, or at least on the path toward a near-term resolution.
“Nonetheless, investors will be eager for any insight on the extent to which the Fed’s reaction function to the evolution of the real economy has changed under Warsh’s leadership, if at all.”
HAMAD HUSSAIN, CLIMATE AND COMMODITIES ECONOMIST, CAPITAL ECONOMICS, READING, UK:
Oil Price Volatility and Future Outlook
"The latest exchange of military strikes in the Middle East supports our view that oil prices will be volatile over the coming months, and will face bouts of upward pressure. That said, under the assumption that some form of a ceasefire ends up holding and oil flows continue to recover, we think Brent crude prices will settle close to current levels at the end of this year."
FIONA CINCOTTA, SENIOR MARKET ANALYST, CITY INDEX, LONDON:
Fragility of the Peace Process
"This was always a very fragile peace process. The fact that oil prices had already fallen back to pre-war levels
