Asian stocks headed for a second week of strong gains while oil prices were pinned below $100 a barrel with investors dialling back risk ahead of a crucial weekend that could pave the way for a near-term resolution to the Middle East war.
A 10-day ceasefire between Lebanon and Israel went into effect on Thursday and President Donald Trump said the next meeting between the U.S. and Iran may take place over the weekend, when their current ceasefire is due to expire.
Investors have been quick to take an optimistic view on any signs of denouement this month, even though the Strait of Hormuz – through which a fifth of the world’s oil and gas supply typically flows – remains closed.
That has kept oil prices below $100 per barrel though they remain well above the pre-war levels. Brent crude futures dropped more than 1% to $98.14 a barrel. U.S. West Texas Intermediate crude futures fell 1.6% to $93.15 a barrel.
In stocks, MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.8% as investors locked in profits after a blistering rally this month.
The index remains close to its highest since March 2, the first trading day after the Iran war broke out, and is up 14.5% in April after dropping 13.5% last month.
Japan’s Nikkei slipped 1% after hitting a record high on Thursday. Almost all stock markets are back to levels before the war erupted at the end of February.
For Andrew Chorlton, CIO for public fixed income at M&G, the last two weeks have been surprising in how quickly markets have been willing to look through the conflict and energy shock.
“There’s quite a strong contrast between what policymakers and central bankers are saying about the risks that this (conflict) is creating versus what the market is implying,” he said.
“That seems somewhat complacent,” Chorlton added. “It seems unlikely that there shouldn’t be some additional risk premium priced in, either to growth or to inflation.”
The U.S. dollar benefited from safe-haven flows in March, but has since given up those gains. The euro last bought $1.1779, just below the seven-week high it touched in the previous session.
The U.S. benchmark S&P 500 and the tech-heavy Nasdaq rose modestly to record closing highs for a second straight day on Thursday. U.S. futures were little changed in Asian hours while European futures pointed to a subdued open.
“I think equity markets are remaining positive and some solid U.S. earnings have helped, but – and it’s a big but – we need to see some concrete evidence that peace is going to last,” said Nick Twidale, chief market strategist at ATFX Global.
“And to me, that is a full reopening of the Strait, or we could see some substantial corrections in global stocks in the coming days and weeks.”
Closure of the waterway has caused the worst oil price shock in history, and spurred the International Monetary Fund to downgrade its outlook for the global economy, warning that a prolonged conflict could push the world to the brink of recession.
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was at 98.24, loitering near its lowest since March 2. The index had declined for eight straight sessions through Wednesday.
The risk-sensitive Australian dollar fetched $0.7163, drifting near the four-year high it touched on Thursday.
The yen was slightly weaker at 159.40 per dollar as investors took stock of comments from Bank of Japan Governor Kazuo Ueda, who steered clear of signalling a rate hike was on the cards this month.
The remarks will keep traders guessing on the timing of the next rate hike, with the lack of a clear signal leading markets to reduce bets of a rate increase at the BOJ’s April 27-28 policy meeting.
-Reuters
