Stock markets wary, oil steady on Hormuz tensions; traders eye central banks

By Alun John and Wayne Cole

LONDON/SYDNEY, March 16 (Reuters) – Investors were in a cautious mood on Monday as hostilities in the Gulf kept oil prices elevated, clouding an inflation outlook that should keep most central banks on pause at policy meetings this week.

Israel said on Monday it has detailed plans for at least three more weeks of war as its military pounded sites across Iran overnight, while Iranian drone attacks temporarily shut Dubai airport and hit a key oil facility in the United Arab Emirates.

U.S. President Donald Trump on Sunday called for a coalition of nations to help reopen the vital Strait of Hormuz, warning that the NATO alliance faces a “very bad” future if its members fail to come to Washington’s aid.

Benchmark Brent crude was last at $103.3 a barrel, flat on the day and retreating from earlier highs after Reuters reported oil-loading operations had resumed at the UAE port of Fujairah. [O/R]

But still, it is up from below $70 a barrel in late February before the war started, and had dipped under $60 a barrel in early January. [O/R]

This sharp rise and its potential inflationary effect has caused markets to dramatically reassess the amount of central bank easing they expect this year.

Traders now are not quite fully pricing in one U.S. Federal Reserve rate cut this year and expect at least one hike by the European Central Bank by the end of 2026.

Interest-rate setters in the U.S., Britain, euro zone, Japan, Australia, Canada, Switzerland and Sweden will this week all hold their first meetings since the start of the war, and investors hope they will get some more colour on policymakers’ thinking.

The big question for officials is, “How long does the conflict last (and) does the shock in energy prices – offset by fiscal support – cause second-round inflation effects and therefore require restrictive monetary policy,” said Kenneth Broux, head of corporate research FX and rates at Societe Generale.

“Or are economies heading down a recessionary path, and does oil trigger a bear market in risk assets?”

Risk assets like stocks have fallen sharply since the conflict began, but were somewhat steadier on Monday as investors tried to process what might happen next.

Europe’s broad STOXX 600 rose 0.3% on Monday, though it is down nearly 6% since the war began. U.S. shares have fallen less, the S&P 500 is down 3.5%, and futures were up 0.95% in early European trading. [.EU]

Earlier in the day, Asia-Pacific stocks nudged up 0.7%, helped by a rebound in South Korea. The once-loved, tech-heavy KOSPI benchmark has been an epicentre of selling globally since the war began, but even with Monday’s 1% gain, it is down 11% in March. [.KS]

Chinese blue chips were flat after data showed retail sales and industrial output for January and February topped forecasts, while house prices continued to slip. 

Top U.S. and Chinese officials are also meeting in Paris to discuss potential deals in agriculture, critical minerals and managed trade for Trump and Xi to consider when the U.S. president visits Beijing.

ALL THE CENTRAL BANKS

The dramatic move in central bank pricing has caused major shifts in government bonds.

Ten-year Treasury yields <US10YT=RR> were at 4.23%, down around 5 basis points on the day though still up 27 bps so far this month, as futures have sharply scaled back the scope for future rate cuts.

The Fed is considered certain to hold on Wednesday and the chance of an easing by June has fallen to just 26% from 69% a month ago. 

Rate-sensitive, shorter-dated yields have moved even more dramatically, and two-year German yields have risen 37 basis points, while the equivalent British gilt yield has increased 55 bps. [GVD/EUR]

A cautiously steady outcome is expected from the other central bank meetings, excluding the Reserve Bank of Australia, which is seen likely to raise its cash rate a quarter point to 4.1% as it battles resurgent inflation at home.

The heightened volatility in markets has tended to benefit the U.S. dollar as a store of liquidity. The United States is also a net energy exporter, giving it a relative advantage over Europe and much of Asia, which are net importers.

But the dollar was trading lower on Monday, losses which accelerated as the oil price dropped back.

The dollar eased 0.4% to 159.0 yen, moving further from its 20-month top of 159.75 hit on Friday, with investors wary in case a break of 160.00 triggers further warnings of intervention from Japan. [FRX/]

The euro gained 0.6% from near a seven-month low to $1.1482

Gold was down 0.2% at $5,009 an ounce, having so far seen scant support as a safe haven or as a hedge against inflation risks. [GOL/] 

(Reporting by Wayne Cole in Sydney and Alun John in London; Editing by Shri Navaratnam, Kate Mayberry, Thomas Derpinghaus and Pooja Desai)