By Mike Dolan
LONDON (Reuters) -What matters in U.S. and global markets today
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In this latest round of Middle East violence, the oil price has been remarkable as much for what it hasn’t done as for what it has. Oil prices initially rose this morning following the U.S. strike on Iran over the weekend, but crude has since given back all these gains.
I’ll discuss this and the rest of the market news below, and then in today’s column, I ask why markets are remaining surprisingly calm despite mounting U.S. debt concerns.
Today’s Market Minute
* Iran said on Monday that the U.S. attack on its nuclear sites expanded the range of legitimate targets for its armed forces and called U.S. President Donald Trump a “gambler” for joining Israel’s military campaign against the Islamic Republic.
* The U.S. bombing injected fresh uncertainty into the outlook for inflation and economic activity at the start of a week chock full of new economic data and central banker commentary, including two days of Congressional testimony from Federal Reserve Chair Jerome Powell.
* Utilities in the developed world are stressing over how to keep up with demand from data centres and artificial intelligence searches. But globally, keeping people cool is likely to be a much bigger drain on electricity grids and a more pressing power sector challenge. Read the latest from ROI global energy transition columnist Gavin Maguire.
* The escalation of the Middle East conflict could lead Tehran to disrupt vital exports of oil and gas from the region, sparking a surge in energy prices. But as ROI energy columnist Ron Bousso says, history tells us that any disruption would likely be short-lived.
* Several recent global developments have sparked some of the highest levels of uncertainty in decades. ROI outside contributor Joachim Klement claims equity investors seeking clarity should be careful what they wish for.
Oil keeps calm, MidEast conflict carries on
With global stock and bond markets using crude as a lodestar for how they react to the Iran crisis, the remarkably quick reverse and decline in U.S. oil prices on Monday have seen U.S. and European equities rally following the weekend events.
Wall Street futures were up about 0.25% ahead of Monday’s bell. European and Chinese were higher too, with Japan’s Nikkei bucking the trend even as the yen weakened. Mostly due to the yen slide, the dollar index was firmer.
U.S. President Donald Trump said he had “obliterated” Iran’s main nuclear sites in strikes over the weekend, joining an Israeli assault in an escalation of conflict in the Middle East as Tehran vowed to defend itself. Trump then openly hinted at ‘regime change’ in his social media posts on Sunday.
U.S. crude prices initially jumped above $78 per barrel to their highest since January, but quickly fell back below Friday’s close to trade below $74 – more than $6 below the high for this year and down 11% on levels seen a year ago. Brent prices are down on the day too.
While the escalating conflict surrounding Iran has turned unpredictable, it happens in a market where global space oil production capacity is running in excess of 4 million barrels a day – an oversupply expected to persist through the end of next year at least.
What’s more, outsize bets on the direction for oil linked to the outcome of the Iran war are frustrated by numerous binary outcomes – including both the survival of the Tehran government and even possible mining of the Straits of Hormuz. While the latter could stymie shipping in the region for a bit, it’s not clear how long it could be enforced.
With global demand set to ebb later this year, due in part due to the growth-dampening effects of U.S. trade tariffs, and U.S. production set to increase, speculative oil price punts are very risky.
With oil prices still largely under wraps, the fallout for U.S. Treasuries is similarly limited.
With one eye on Federal Reserve chief Jerome Powell’s semi-annual Congressional testimony on Tuesday and series of debt auctions during the week, 10-year yields remained stuck in recent ranges about 4.4%.
Trump on Friday again floated the idea of firing Powell.
“I don’t know why the Board doesn’t override (Powell),” Trump wrote in a lengthy post on Truth Social criticizing Fed policy. “Maybe, just maybe, I’ll have to change my mind about firing him? But regardless, his Term ends shortly.”
San Francisco Fed President Mary Daly said on Sunday that U.S. central bank should consider giving less forward guidance about its monetary policy intentions, particularly in uncertain times. “Words have power, which is a great tool. But words can be harder to reverse than the interest rate,” she said.
The economic data calendar homes in on June business surveys, with the flash versions of U.S. soundings from S&P Global due out later in the day.
Overall euro zone business activity expanded only modestly in June, with a small improvement in the dominant services industry offsetting more downbeat manufacturing.
The services PMI nudged up to sit right on the break-even 50 mark up from May’s final reading of 49.7. Optimism among services firms increased and the business expectations index bounced to a four-month high of 57.9 from 56.2.
European Central Bank boss Christine Lagarde testifies at the European Parliament later in the day.
Economic surprise indexes, capturing how incoming economic readings are above or below expectations overall, show a sharp divergence between Europe and the United States – with the euro zone index at its most positive since May and the U.S. equivalent at its most negative in nine months.
Elsewhere, Bitcoin was sharply lower over the weekend, while gold prices also fell back early on Monday.
Chart of the day
Relatively quick reversals of oil price spikes were largely thanks to the ample spare production capacity – and also due to the fact that any rapid oil price increase curbs demand in turn. The current global oil market certainly has spare capacity. OPEC+, an alliance of producing nations, today holds around 5.7 million barrels per day in excess capacity, of which Saudi Arabia and the United Arab Emirates hold 4.2 million bpd. Although there are concerns about closing of the key Straits of Hormuz waterway, the two Gulf powers could bypass it by oil pipelines. Saudi produces around 9 million bpd and has a crude pipeline that runs from the Abqaiq oilfield on the Gulf coast in the east to the Red Sea port city of Yanbu in the west. The UAE, which produced 3.3 million bpd of crude oil in April, has a 1.5 million bpd pipeline linking its onshore oilfields to the Fujairah oil terminal that is east of the Strait of Hormuz.
Today’s events to watch
* Flash U.S. June business surveys from S&PGlobal (0945EDT) May existing home sales (1000EDT)
* Federal Reserve Board Governor Christopher Waller, Fed Board Governor Adriana Kugler, Fed Vice Chair for Supervision Michelle Bowman, and Chicago Fed President Austan Goolsbee all speak. European Central Bank President Christine Lagarde speaks to European Parliament (0800EDT)
* EU-Canada summit takes place in Brussels
* U.S. Treasury sells $58 billion of 3-year notes
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
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(By Mike Dolan; Editing by Anna Szymanski)
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