Tense wait for antipodean markets as oil price surge triggers global rout

Australian futures are pointing to a soft start to the trading day across the Tasman as global stock markets were routed by the surge in oil prices as the Middle East conflict dragged into a fourth day of what’s expected to be a weeks-long campaign, with Caterpillar, Nike and Boeing leading the Dow Jones Industrial Average lower in late trading.

European stock markets slumped in one of their worst days since US President Donald Trump upended the world trade order with his Liberation Day tariff regime, while mining stocks gave back earlier gains this week as gold futures tumbled.

Airlines on both sides of the Atlantic were among the hardest hit with the immediate disruption in Dubai triggering a sharper response than previous flare-ups in the region, with American Airlines, Delta Air Lines, United Airlines, Air France and Deutsche Lufthansa all on the red side of the ledger.

Meanwhile, the kiwi dollar tumbled as investors turned to the greenback as a haven asset, with bonds sold off again on fears that rising energy will stay the Federal Reserve’s hand on cutting its benchmark interest rate.

Escalating attacks

Stocks on both sides of the Atlantic and government bonds were broadly weaker as Brent crude oil futures jumped 5.8% to US$82.23 a barrel at 7am in Auckland as the conflict between the US and Iran intensified with strikes across the Middle East

US President Trump acknowledged oil prices will likely stay elevated in the short term, while officials said military strikes on Iran will continue for weeks and grow in intensity.

The volatility index – known as Wall Street’s fear gauge – jumped 12% to 24.03 as investors grew increasingly nervous about the impact of the Middle East conflict.

The S&P 500 dropped 1.2% in late trading and the Nasdaq Composite was down 1.3%, while the Dow declined 1.2%, with heavy equipment maker Caterpillar down 3.9% leading the benchmark lower.

Bonds continued to be sold off, with the yield on US 10-year Treasuries rising 2 basis points to 4.07% as traders pared their bets on the Federal Reserve cutting the federal funds rate given the inflationary impulse of the spike in energy prices.

Gold futures dropped 4.2% to US$5,088 an ounce as the traditional haven lost its lustre, with miners such as Freeport-McMoRan and Newmont declining, while Bitcoin dropped 1.2% to US$68,317.

“After initial caution, investors are taking a more pessimistic view of the conflict in the Middle East, seeing less chance of a quick resolution,” Bank of New Zealand senior markets strategist Jason Wong said in a note. “Global equity markets have tumbled, and oil and gas prices have surged further.”

A new old haven

The greenback came back into favour for investors seeking a safe harbour, with the kiwi falling to 58.79 US cents at 7am in Auckland from 59.47 cents yesterday, providing something of a cushion to exporters such as Fisher & Paykel Healthcare and a2 Milk Co, which derive most of their income in foreign exchange.

Meanwhile, milk prices rose at the latest Global Dairy Trade auction, with the GDT price index up 5.7% with an average selling price of US$4,301 a tonne. Whole milk powder prices gained 4.5% to US$3,863 a tonne.

Airlines remained under pressure, weighing on stock markets on both sides of the Atlantic, with European bourses facing their steepest declines since the Liberation Day tariffs last year. The UK’s FTSE 100 index dropped 2.8%, while Germany’s DAX sank 3.4% and France’s CAC 40 declined 3.5%.

Air New Zealand weathered the turbulence relatively well at the start of the week, shedding 0.9% since trading opened on Monday, while Australia’s Qantas Airways has dropped 7.1% so far this week.

Australian futures are pointing to a 1.5% slump for the S&P/ASX 200 index, ahead of December quarter gross domestic product figures being released today.

Reserve Bank of Australia governor Michele Bullock yesterday said every policy meeting is a live one, with board members gauging whether the oil supply shock will add further fuel to inflationary pressures in the economy.

The kiwi dollar traded at 83.70 Australian cents from 83.61 cents yesterday.

Local data today include Statistics New Zealand’s December quarter terms of trade, which are expected to show robust growth, and ANZ’s commodity price index.

Mercury NZ is among companies shedding rights to their dividends today, with Fisher Funds-managed investment vehicles Kingfish, Barramundi and Marlin Global also going ex-dividend.

Reporting by Paul McBeth. Image from Jared Evans on Unsplash.