Oil and gold slump halted as Israel accuses Iran of violating ceasefire
Oil prices (BZ=F, CL=F) have eased in early London trading hours after US president Donald Trump declared that Israel and Iran have negotiated a ceasefire. However, there has been a rise in the last few minutes, after Israel accused Iran of violating the ceasefire.
Brent crude (BZ=F) lost 2.6% to $69.61 a barrel, while West Texas Intermediate dropped by the same margin to $65.92 in early trading.
That's Brent's (BZ=F) lowest level since 11 June, just before Israel launched a series of airstrikes targeting Iran's nuclear and military sites. Over the past week, oil prices had spiked as concerns mounted that Iran might retaliate by blocking the Strait of Hormuz, a vital chokepoint for global oil and gas shipments.
The price surge had sparked fears of rising living costs, with petrol, diesel and business expenses all likely to increase.
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"If the ceasefire is followed as announced, investors might expect the return to normalcy in oil," said Priyanka Sachdeva, senior market analyst at Phillip Nova.
However, she added that "the extent to which Israel and Iran adhere to the recently announced ceasefire conditions will play a significant role in determining oil prices".
Tensions spiked again as Israel this Tuesday morning accused Iran of violating the ceasefire. Israeli defence minister Israel Katz issued a statement, saying he has ordered the Israel Defense Forces to "respond forcefully to Iran's violation of the ceasefire with intense strikes against regime targets in the heart of Tehran".
Gold prices (GC=F) fell to their lowest level in nearly two weeks on Tuesday morning, as news of a ceasefire between Iran and Israel prompted investors to retreat from safe-haven assets and embrace riskier trades. However, picked up slightly amid reports of the ceasefire violation.
In early European trading, gold futures dropped 1.7% to $3,336.00 an ounce, while spot gold edged 0.1% lower to $3,329.41 per ounce.
"It seems like there's a good bit of geopolitical risk that's exiting the market here near term after, of course, we have signs of de-escalation between the US and Iran," said Ilya Spivak, head of global macro at Tastylive.
The truce, which ends a 12-day conflict between Israel and Iran, has sharply reduced near-term geopolitical tensions that had driven strong demand for gold in recent weeks.
'The market is pricing out the premium that was built in over potential supply disruptions and broader regional escalation,' said Alex Hines, commodities strategist at HBC Futures.
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With the Middle East tensions receding, investor focus has shifted toward US monetary policy. US Federal Reserve officials have signalled the possibility of a rate cut as soon as July, contingent on continued progress in taming inflation. On Monday, Fed vice chair for supervision Michelle Bowman said she was open to easing policy if inflationary pressures continue to abate.
Gold (GC=F), which tends to perform well in a low-interest-rate environment, could still benefit if the Fed does opt to cut. But markets remain cautious.
"The bias for gold prices is higher, but we might see a correction in the near term and an uptick in the dollar if Powell convinces markets that they're not going to cut more than twice this year," Spivak said.
The pound has surged against the dollar (GBPUSD=X), up by 0.4% to $1.3577 at the time of writing, as the ceasefire between Israel and Iran reduced safe-haven demand for now.
The US dollar index (DX-Y.NYB), which tracks the greenback against a basket of six currencies, lost 0.3% to 98.12, from a fresh two-week high of around 99.40 posted the previous day.
"Iran had previously threatened to block the Strait of Hormuz, which is one of the world's most important transport routes for oil and natural gas, and the fact that Iran did not attack energy-related targets caused oil prices to fall and stock markets to rise," said Elisabet Kopelman, US economist at SEB Macro & FICC research.
"So far, a ceasefire – or at least the averted risk of extended conflict – seems to be the main assumption in the markets," she added.
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A de-escalation in the conflict should enable the pound and the euro to extend a recovery; however, upside will likely be limited owing to the UK's slowing economy and the heightened odds that the Bank of England will accelerate the interest rate cutting cycle.
In other currency moves, the pound was higher against the euro (GBPEUR=X), up 0.3% to €1.1707 at the time of writing.
In equities, the UK's FTSE 100 (^FTSE) climbed 0.5% to 8,797.46 points at the time of writing. For more details, follow our live blog coverage here.Sign in to access your portfolio
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Iran's controversial uranium enrichment program, which uses sensitive centrifuges often installed deep underground in fortified bunkers, is likely to have been rendered inoperable or damaged, if not entirely destroyed. Trump insists Iran will 'never' be able to rebuild its nuclear program. 'That place is under rock, that place is demolished,' he told reporters in Washington on Tuesday before heading to the NATO summit in The Hague. But if there is political will, Iran may have the capacity and the means to do revive its program, especially given that its technical know-how is likely to have survived, despite the targeting by Israel of multiple Iranian nuclear scientists. Moreover, officials at the UN nuclear watchdog, the IAEA, confirm they are still uncertain of the whereabouts of the nuclear material Iran has already manufactured, including some 880 pounds of uranium-235 enriched to 60% purity, which is dangerously close to weapons-grade levels. A top Iranian nuclear official, Mohammad Eslami, who is the head of the country's atomic energy organization, insisted that Iran 'planned ahead of time' to ensure there would be 'no interruption to our nuclear program.' Meanwhile, Iranian state media reported that nuclear sites were 'evacuated' ahead of the US strikes, raising concerns that some or all of the enriched nuclear material has been preserved, possibly at a secret facility unknown to inspectors. However, even if Iran was able to safely hide its enriched uranium, turning this into weapons-grade material 'is not going to be a fast process,' since the US and Israeli bombing campaign has 'done serious damage to Iran's capability to build a nuclear weapon,' said David Albright, a former UN nuclear weapons inspector who is now the president of the Institute for Science and International Security (ISIS) think tank. He assessed that it would take Iran 'a good year or two' to build a nuclear weapon. 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If that happens, it would almost certainly be interpreted as confirmation of an Iranian intent to build a bomb. But it's not certain that the highly volatile situation will develop in this way. One other consideration that may slow any dash by the Islamic Republic to cross the nuclear threshold and build a weapon is the potential threat of regime change, actively sought by Israel and toyed with, in recent days, by Trump. For the moment, with a ceasefire in place, that threat appears to have receded. And Trump has since told reporters he does not want to see regime change in Iran, saying such a move would create chaos. But if there's any further sign of Iran edging towards a nuclear breakout, that regime change option – however fraught with danger and unpredictability – may find its way back onto the table. A comprehensive nuclear deal with Iran is also still an option. Last week in Geneva, top European and Iranian diplomats explored ideas for a possible agreement, including a proposal for direct talks between Iran and the US. Then, in the aftermath of the US strikes on Iran, one Western European diplomat told CNN that 'real window of opportunity' had been 'slammed shut' by the American action. But now, if the fragile US-brokered ceasefire between Iran and Israel holds, it may have just opened up that window once again.
