Stocks fall, oil rallies as Middle East tensions unnerve investors

Zawya

5 hours ago

Stocks fell, while oil and gold rose on Tuesday, as fighting between Israel and Iran entered a fifth day, making investors nervous over the risk of the conflict widening in a week packed with key central bank decisions.
U.S. President Donald Trump urged everyone to evacuate Tehran and cut short his visit to the Group of Seven summit in Canada. He said he wanted a "real end" to the nuclear dispute with Iran and indicated he may send senior U.S. officials to meet with representatives from Tehran.
With nerves running high over the conflict, S&P 500 futures fell 0.6%, while crude prices rose as much as 2.2% to a high of $74.85 a barrel, bringing gains in the last week to around 11%.
Adding another layer of complexity for investors this week is a raft of central bank meetings, starting with the BOJ and including the Federal Reserve, Bank of England and Swiss National Bank.
"Investors are trying to take all this on board. It is very difficult at the moment, I think. And there's an understandable degree of nervousness. Should I really be holding on to these stocks now at these levels?" Chris Beauchamp, chief market analyst at IG, said.
"Once the central bank parade is out of the way, then we might get a better sense of where they view things."
The heightened uncertainty kept investors flocking to traditional safe-haven assets, as a rise in U.S. Treasuries pushed yields lower across the curve, while gold prices edged up 0.3%.
Stocks in Europe sagged, leaving the STOXX 600 down almost 1% on the day and around its lowest in three weeks, while euro zone government bond yields held steady.
The major concern for investors with the conflict between Israel and Iran is the potential for it spill over into the broader Middle East, home to a large portion of the world's oil supply.
No disruptions to crude supply have been reported yet, although news of a collision between two ships in the Gulf of Oman sent another brief jolt through the oil market overnight.
Aside from the oil price, financial markets are not displaying especially high levels of volatility.
The VIX volatility index has risen in the last week, but at around 20.8 is well below April's highs above 60 and nowhere near the records above 80 during the 2008 financial crisis.
"This is happening at a point in time where we are less sensitive, first of all the fact being that oil prices are still down year to date, and secondly the macro economy is ... showing that financial markets are relatively resilient at the moment," Bjarne Breinholt Thomsen, head of cross asset strategy at Danske Bank, said in a webinar on Tuesday.
BOJ OUTLOOK
The Bank of Japan, the first major central bank to decide on monetary policy this week, left short-term interest rates unchanged at 0.5% as expected. The central bank said it would slow the pace at which it is unwinding its massive holdings of government bonds to avoid disrupting the market.
Weak demand for Japanese government bonds (JGBs) at recent auctions, along with concern about the country's finances, sent longer-dated borrowing costs spiralling to record highs last month.
The yen held steady, leaving the dollar at 144.755.
Meanwhile, the Federal Reserve is expected to keep rates unchanged on Wednesday. Policymakers will also release new projections for interest rates, which investors will assess to get a sense of how the committee believes the Trump administration's tariffs could affect growth and inflation.
Traders are pricing in two cuts by the end of the year.
Meanwhile, tariff negotiations between Japan and the United States on the sidelines of the G7 summit fell short of a breakthrough, while a deal with Britain left unresolved the issue of steel and aluminium duties.
Gold, which has gained 30% so far this year, was up another 0.4% at $3,395 an ounce.
(Additional reporting by Lucy Raitano in London and Johann M Cherian and Ankur Banerjee in Singapore; Editing by Kim Coghill, Bernadette Baum and David Evans)