Stocks wobble, oil jumps on Middle East tensions; BOJ in focus

Observer

5 hours ago

Global stocks slid and oil prices rose on Tuesday as fighting between Israel and Iran entered its fifth day, sowing fears of a broader regional conflict, while investors took in stride the Bank of Japan's decision to slow the pace of its bond tapering.
U.S. President Donald Trump urged everyone to evacuate Tehran and cut short his visit to the Group of Seven summit in Canada, while a separate report said he had asked for the National Security Council to be prepared in the situation room.
The developments sparked a wave of risk-off moves in which S&P 500 futures fell 0.4% and European futures dropped 0.7%.
Crude prices were last up 0.7% at about $73 a barrel, after having briefly jumped more than 2% earlier in the session.
"Suspicion is that we're about to see the United States begin some sort of military action in Iran and we're now seeing some risk aversion because it brings another element of uncertainty," said Tony Sycamore, a market analyst at IG.
Heightened uncertainty drove investors 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%.
MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.2%, while China and Hong Kong equities slipped 0.1% each.
Markets fear that conflict between Tel Aviv and Tehran could spill over into the oil-rich Middle East, though no disruptions have been reported yet.
Oil markets' reactions have been the most volatile, while stocks and currencies have been more guarded.
The air war between Iran and Israel, the longtime enemies' biggest battle ever, escalated on Monday, with Israel targeting Iran's state broadcaster and uranium enrichment facilities.
The Bank of Japan (BOJ) kicked off monetary policy decisions among central banks this week, leaving short-term interest rates unchanged at 0.5% as expected.
The central bank also decided to leave unchanged its existing bond taper plan through March 2026, but set out a new plan beyond next April to decelerate the pace of its balance sheet drawdown.
After trying to prop up Japan's flagging economy through JGB purchases for years, the BOJ has been trying to gracefully shrink those holdings since July in a process called quantitative tightening.
However, weak demand at recent auctions caused a surge in super longer-dated yields to records last month and the central bank is effectively offering support to the bond market by a slowdown in tapering. The next test for markets will be an auction of 20-year JGBs on June 24.
The yen firmed and last stood at 144.56 per dollar, while yields on 5-year and 10-year bonds rose about 3 basis points each as the BOJ's outlook reflected less support for shorter-dated tenors. Investors are now focussed on BOJ Governor Kazuo Ueda's press conference at 0630 GMT.
"The slower pace of bond tapering was what the market had hoped for and it help prevent long-term interest rates from shooting up," Saisuke Sakai, a senior economist at Mizuho Research and Technologies said.
"In that sense it could help reduce risks of sharp rises in long-term interest rate, when the BOJ decides to raise the policy rate again."
In a week filled with central bank meetings, the spotlight next turns on the Federal Reserve.
The U.S. central bank is expected to hold rates steady on Wednesday but the focus yet again will be on the path Fed Chair Jerome Powell charts for future rate cuts as policymakers try to navigate Trump's erratic tariff policies and their global impact.
Traders are pricing in two cuts by the end of the year. Investors also monitored developments on trade deals with Trump's early July deadline on tariffs fast approaching.
Tariff talks 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.