Contracts for the S&P 500 index were down 0.8% while a gauge of Asian shares fell as much as 1.1% in early trade. Treasury yields rose. Oil gained for a second day as heightened rhetoric about an Iran war raised concerns about a protracted conflict, weighing on emergency releases of crude reserves by rich nations.
Energy markets remain the biggest focus for investors as volatility in oil and gas prices continues to weigh on inflation expectations. U.S. equities were little changed on Wednesday while Treasuries fell along the curve as data showed inflation slowed from a month earlier in February. It expresses concern that the Iran war, which has pushed up energy costs, is complicating the Federal Reserve’s approach to interest rates. Traders now expect the Fed to cut rates only once this year.
“Despite the potential release of oil reserves, continued uncertainty translates into continued risk for oil prices, and that translates into the Fed remaining cautious about cutting interest rates,” said Alan Zenner at Morgan Stanley Wealth Management.
There has been no respite in the nightly fighting in the Middle East, with attacks damaging energy infrastructure. According to the report of the Iraqi state news agency, Iraqi oil ports have completely stopped their activities due to the attack on two tankers.
The United States plans to withdraw 172 million barrels from emergency oil reserves as countries around the world work to reduce oil prices. It is part of a plan by member countries of the International Energy Agency to release 400 million barrels from global reserves, the largest ever release.
President Donald Trump said a massive release of emergency oil reserves approved by the IEA would ease pressure on energy prices as the United States tries to “finish the job” in its campaign against Iran. Iran has told regional mediators that for a ceasefire, the US must guarantee that neither it nor Israel will attack the country in the future. Trump said he did not believe Iran had laid mines in the Strait of Hormuz and repeated his suggestion that the war would end soon.
Meanwhile, Morgan Stanley has stopped divesting its private credit funds, returning less than half of the capital that investors sought for cash. This added to the wave of calls for bailouts amid growing concerns about the quality of loans in the industry.
Change of route
In Asia, the yen hit its weakest level against the greenback since January. After keeping policy settings steady next week, the Bank of Japan is likely to raise interest rates in April, according to a third of economists surveyed.
The S&P 500 was down 0.1% on Wednesday, while the Nasdaq 100 was flat.
Data out Friday will likely paint a tougher inflation picture. Economists see the Fed’s favorite core personal consumption expenditure price index up 0.4% again in January. Compared to the same month last year, the average forecast calls for a 3.1% increase.
“February’s inflation numbers were moving in the right direction, but then the conflict in the Middle East erupted, and now the trajectory is reversed,” said Brian Jacobson at Annex Wealth Management.
While investors are focused more on how the conflict in Iran will boost inflation in the coming months, the latest data provides some reassurance that price pressures ahead of the latest energy shock were not misdirected, Sima Shah said.
“The Fed has historically looked at energy-driven prices,” she noted. “But while inflation has sat above target for nearly five years, this time around it may be difficult.”
