(Bloomberg)– Financial markets got off to a volatile start on Monday, with futures on US stock indexes and crude oil rocked as the war in Iran entered its fourth week with no signs of de-escalation.
Crude oil swung sharply, initially rising 1.9%, before reversing to fall nearly 1.8% to $110 a barrel. S&P 500 futures were similarly volatile, gaining briefly before stabilizing with a 0.1% decline. Australian shares fell 2% at the open and futures pointed to a weak start for stocks across the region.
Australian 10-year government bonds extended losses, with yields on the benchmark bond rising 11 basis points on Monday.
Tensions in the Middle East showed no signs of easing and President Donald Trump issued a 48-hour ultimatum to Tehran to reopen the Strait of Hormuz or face attacks on its power plants, a deadline that expires Monday night in New York. Iran responded that any such attack would force it to close the waterway indefinitely and attack US and Israeli energy infrastructure throughout the region.
“Withdrawing from this war is not Trump’s decision alone,” Matt Maley, chief market strategist at Miller Tabak, said in an interview. “Uncertainty has increased for three weeks and now it has taken a big jump. Even if people don’t sell, they won’t buy, and if there are no offers, a vacuum is created.”
Global markets have been devastated by the war between the United States and Iran, which caused a simultaneous sell-off in stocks and bonds last week. US yields are at their highest level in months after a third straight week of losses in bonds. Short-term bonds led last week’s decline, with two-year Treasury yields rising 18 basis points to 3.90%, following selloffs in European bond markets as investors positioned for higher rates.
The sell-off in the United States accelerated on Friday as traders began to anticipate that the Federal Reserve could move to raise interest rates this year, as oil prices threaten to generate a new inflationary shock. Markets are bracing for similar moves by central banks in Japan, Europe and the United Kingdom, even as the war also affects global economic growth prospects.
After markets closed on Friday, Trump indicated he was looking for a way to withdraw from the war by saying on social media that he was considering ending military efforts in Iran, saying the United States was “very close” to meeting its goals. But his subsequent threats to bomb power plants (and Iran’s promise to retaliate) showed little progress toward a ceasefire.
“It’s a soft start to risk, but perhaps surprisingly subdued given the ultimatum hanging over the market,” said Chris Weston, head of research at Pepperstone Group in Melbourne.