Markets eye RBA rate hike as investor mood improves

Stock markets on Wall Street and in Europe rallied as the mood improved among investors, with crude oil prices nudging lower as a handful of tankers managed to navigate the fraught waters of the Strait of Hormuz, even as US President Donald Trump struggles to bring allies on board in securing the channel.

Still, Iran has stepped up attacks and Dubai International Airport suspended operations after a drone strike caused a fire at nearby fuel tanks, while Polymarket prediction markets price in the conflict dragging on into June.

Central banks will give their view on the conflict this week, with the Reserve Bank of Australia first up today and expected to hike the target cash rate a quarter-point to get on top of emerging inflation that predated the flare-up.

Chipmaker Nvidia led the Dow Jones Industrial Average higher ahead of keynote speech by chief executive Jensen Huang at the firm’s annual developers’ conference.

Inflationary pressures

The RBA’s board is expected to lift the target cash rate to 4.1% from 3.85% at today’s policy review, as Australia seeks to stamp out inflationary pressures coming to bear before the energy shocks caused by the conflict in Iran. Bond traders have priced in 16 basis points of increases at today’s meeting.

The kiwi dollar traded at 82.90 Australian cents at 7am in Auckland from 82.88 cents yesterday.

Governor Michele Bullock is the first central banker to outline the bank’s response as the Middle East conflict triggered a surge in oil prices, creating another supply-side inflation shock, with the Federal Reserve, European Central Bank and Bank of England predicted to keep their key rates unchanged when they review policy later this week.

The policy review comes as investor sentiment improved overnight, with the volatility index – known as Wall Street’s fear gauge – falling 11% to 24.19 and Brent crude oil futures dipping 1.8% to US$101.25 a barrel.

A Pakistani-flagged tanker carrying crude and two Indian vessels loaded with LNG made it through the Strait of Hormuz in recent days, although US President Trump’s call for help securing the channel has struggled to win over his allies, with the UK, Germany, Japan and France dismissing the prospect of sending ships.

“Risk appetite is higher on optimism that the worst is over regarding the Iran conflict, while the reality is that nothing much has really changed on the battleground,” Bank of New Zealand senior markets strategist Jason Wong said in a note. “Despite more optimism in markets overnight, the reality is that the conflict continues unabated, with Iran striking a key UAE oil-export hub and Saudi Arabia and Kuwait intercepting a number of drones targeted at them.”

Risky sentiment

That improved risk sentiment helped the kiwi dollar climb to 58.49 US cents at 7am from 58.10 cents yesterday, while the yield on US 10-year treasuries fell 3 basis points to 4.23%.

Still, Polymarket prediction markets have priced in a 36% chance of a ceasefire by the end of April and a 49% chance by the end of May, with the balance shifting to 56% in June.

Gold futures fell 1.4% to US$4,990 at 7am in Auckland, with trading in all contracts on the London Metal Exchange halted for several hours due to an issue with the platform.

Stocks on Wall Street were stronger, with the S&P 500 up 1% in late trading and the tech-heavy Nasdaq Composite advancing 1.3%. The Dow rose 0.8%, with Nvidia, Salesforce and Boeing leading the blue-chip index higher.

Airlines rallied, with gains for American Airlines, Delta Air Lines, United Airlines and Deutsche Lufthansa among the day’s gainers.

Nvidia is holding its annual conference in San Jose, California, with CEO Jensen Huang set to give a keynote address, where he’s expected to talk about the computing needed to drive artificial intelligence tools.

In Europe, the UK’s FTSE 100 rose 0.6% and France’s CAC 40 nudged up 0.3%, while Germany’s DAX advanced 0.5%, led by Commerzbank after Italian lender UniCredit said it plans to boost its stake of the German bank.

Australian futures are pointing to a 0.4% gain for the S&P/ASX 200 index when trading opens across the Tasman, potentially snapping a three-day decline. New Zealand’s S&P/NZX 50 index has similarly dropped in the past three sessions.

Stats NZ will release its February selected prices index today, giving an update on how inflation was tracking before the Iran conflict erupted. Meanwhile, the Reserve Bank’s foreign holdings of government bonds are also due today.

Reporting by Paul McBeth. Image from Fidel Fernando on Unsplash.