Markets rally as Trump pauses Iran strikes; RBNZ’s Breman looms

Investors breathed a sigh of relief after US President Donald Trump paused strikes on Iran for five days, prompting a rally for stock markets and pulling back yields on government bonds as oil prices dropped on hopes that the Strait of Hormuz will reopen.

Manufacturers 3M and Sherwin-Williams led the Dow Jones Industrial Average higher, while carriers including United Airlines and American Airlines and cruise operators Norwegian Cruise Line Holdings and Carnival Corp gained, providing a strong lead for local travel and tourism firms that were sold off harshly on Monday.

Bond traders are pricing in at least three rate hikes by the Reserve Bank of New Zealand this year as central banks respond to the inflationary pressures caused by the global energy shock, with governor Anna Breman’s speech today on how the monetary authority is viewing the conflict high on the local agenda.

And New Zealand’s government will outline its targeted and temporary package to support low- and middle-income families through the fuel disruptions, with ANZ economists warning any support needs to be fiscally neutral to avoid stressing the Crown’s books, which were put on notice by Fitch Ratings over the weekend.

Pause for breath

Brent crude oil futures dropped 9.8% to US$101.24 a barrel at 7am in Auckland after US President Trump announced a five-day stay on attacking Iranian energy infrastructure, saying talks with Iran are underway to find a potential deal to end the war. Iran’s foreign ministry denied it’s in talks with the US.

Markets welcomed the reprieve, with the volatility index, known as Wall Street’s fear gauge, falling 4.8% to 25.49, while the Polymarket prediction market is pricing in a 51% chance of a ceasefire by the end of April.

The S&P 500 was up 1.5% in late trading, while the tech-heavy Nasdaq Composite rose 1.6% and the Dow was up 1.8%. The UK’s FTSE 100 dipped 0.2%, while Germany’s DAX gained 1.2% and France’s CAC 40 advanced 1.2%.

“Market price action has been whippy, but the net result is improved sentiment after Trump backed down on his weekend threat to obliterate Iranian infrastructure,” Bank of New Zealand senior markets strategist Jason Wong said in a note. “While there is still no obvious end in sight to the hostilities, markets have reacted positively to Trump’s backdown, while denials from Iran that there are any ongoing talks has seen some fading of the initial positive market reaction.”

The yield on US 10-year treasuries fell 8 basis points to 4.34%, while New Zealand’s equivalent starts the day at 4.88%, with bond traders pricing in 88 basis points of hikes by the local Reserve Bank this year.

Central insights

Central bank governor Breman will deliver a speech on how the Reserve Bank is assessing the conflict to a business audience in Auckland today, with the notes to be published at 9am.

“We’ll be interested in her tone on the policy outlook, ahead of the expected surge in inflation and with the modest economic recovery in play under serious threat,” BNZ’s Wong said.

Meanwhile, the government will reveal its planned temporary support package, which finance minister Nicola Willis has said will be targeted towards low- and middle-income families. ANZ economists yesterday urged policymakers to make it fiscally neutral to avoid fuelling further inflation and avoid adding to the uncomfortable debt levels.

The upbeat mood is set to carry on to the antipodes, with futures pointing to a 1.7% gain for the resources-heavy S&P/ASX 200 index when trading opens across the Tasman. Gold futures fell 3.5% to US$4,417 an ounce at 7am in Auckland.

Gains for the likes of Norwegian Cruise Line Holdings, up 7.4% in late trading, and carriers United and American Airlines, both up more than 4%, gave a strong lead for local tourism and travel firms such as Serko, Tourism Holdings and Air New Zealand, which were punished in Monday trading.

Meanwhile, the kiwi dollar clawed back some of its losses, rising to 58.67 US cents at 7am in Auckland from 58.12 cents yesterday. The softer currency has been a cushion for some exporters.

Reporting by Paul McBeth. Image from Alex Waldbrand on Unsplash.