Oil slumps, shares rally on Iran-Israel ceasefire

Oil tumbled nearly 4%, global shares surged and the dollar dropped on Tuesday as markets took heart from a ceasefire between Israel and Iran and shrugged off what US President Donald Trump said were violations by both sides.

Brent futures had already slid 7% on Monday and US shares jumped after Iran made only a token retaliation against a US base to an attack over the weekend, and signalled it was done for now.

With the immediate threat to the vital Strait of Hormuz shipping lane seemingly over, the Brent benchmark touched its lowest since June 11 and was last at $68.81 a barrel, down 3.7%. US crude futures dropped 3.7% to $65.91 a barrel.

“Investors mostly shrugged at what appeared on the surface a seismic geopolitical event over the weekend and those who kept their nerve and held off from de-risking have so far been proven right,” said Kenneth Broux, head of corporate research FX and rates at Societe Generale.

While the ceasefire so far has seemed shaky - Trump said he was “not happy” with either side for violating the truce, particularly with Israel - risk assets held onto their earlier gains.

S&P 500 futures rose 0.8% and Nasdaq futures were 1% higher. Europe’s Stoxx 600 gained 1.3%, with travel stocks including airlines surging 3.8%, while oil and gas names shed 2%.

Earlier in the day, MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 2.2%, while Japan’s Nikkei rallied 1.1%.

A further sign of the sudden improvement in sentiment is that emerging market countries - from Mexico to Kazakhstan via Turkey - have rushed to issue debt in the past two days, as have many companies.

But the positive news did not spill over into the bond market where the focus instead was on Germany’s draft budget, which includes record investment, requiring higher borrowing.

The impact was particularly felt on longer dated bonds. Germany’s 30-year yield rose 8 basis points to 3.06% and its 10-year yield rose 5 bps to 2.60%.

Those moves rippled across markets, with the US 10-year yield up 3 bps at 4.35% and Britain’s 10-year yield up 2 bps to 4.51% , though increasing bets on US rate cuts this year kept US bonds in check.

 Investors are also keeping a close eye on remarks from Federal Reserve policymakers, who in aggregate have been nervous in recent months about giving any signs that rate cuts are imminent.

However, Vice Chair for Supervision Michelle Bowman said on Monday the time to cut interest rates was getting nearer as risks to the job market may be on the rise.

That followed Fed Governor Christopher Waller saying on Friday he would consider a rate cut at the July 29-30 meeting, though Atlanta Fed President Raphael Bostic told Reuters in a story published on Tuesday that the Fed need not cut interest rates with companies planning to raise prices later this year.

Fed Chair Jerome Powell will appear before Congress later on Tuesday and, so far, has been more cautious about a near-term easing.

Markets still only imply around a 20% chance the Fed will cut at its next meeting on July 30, but a September cut is near to fully priced.

News of the ceasefire saw the dollar extend an overnight retreat and slip 0.8% to 144.9 yen, having come off a six-week high of 148 yen on Monday.

The euro rose 0.2% to $1.1602 on Tuesday, having gained 0.5% overnight.

The yen and euro benefited from the slide in oil prices as both the EU and Japan rely heavily on imports of oil and liquefied natural gas, while the US is a net exporter.

The risk-on mood saw gold prices ease 1.4% to $3,319 an ounce.

Copper prices hit their highest in almost two weeks on Tuesday as the dollar fell and the yuan strengthened after US President Donald Trump’s announcement of a ceasefire between Israel and Iran.

Three-month copper on the London Metal Exchange was up 0.7% at $9,730 a metric tone in official open-outcry trading after touching $9,760.50 for its highest since June 11 earlier in the session.

Global markets largely ignored signs that the ceasefire could be fragile, with Trump accusing both Israel and Iran of violating the agreement on Tuesday.

The metals market’s attention was on continuing outflows from copper stocks in LME-registered warehouses, which combined with large holdings of cash copper contracts and warrants - title documents conferring ownership - to inflate premiums for near-term contracts.

Reuters