Shares stumble as war worries drive oil back above $100

By Marc Jones

LONDON, April 23 (Reuters) – Renewed worries about the Iran war and the Strait of Hormuz drove oil back above $100 a barrel on Thursday, prompting a fall back in global share and bond prices and gains for the dollar.

Concerns had returned after Iran on Wednesday seized two ships trying to exit the Strait, leaving investors wondering if the fragile ceasefire with the U.S. that has allowed markets to rebound in recent weeks will be able to hold.

Most of Europe’s main bourses were down between 0.2% and 0.8% ahead of the start of Wall Street trading where the S&P 500 and Nasdaq were both expected to see modest pull-backs from all-time highs reached the previous session. [.N]

It left MSCI’s 47-country world stocks index slipping away from its recent record highs too, [.EU][.T][.N] while the euro was feeling flat as the economic impact of the war on Europe’s leading economies became increasingly apparent.

German data showed that its private sector shrank for the first time in almost a year and business activity in the euro zone as a whole suffered a surprise contraction.

In France, activity dropped at its fastest pace in 14 months and factory orders expanded for the first time in almost four years – a clear sign, analysts said, that firms are rushing to try to avoid shortages and price increases.

“The euro zone is facing deepening economic woes from the war in the Middle East, presenting a major headache for policymakers,” said Chris Williamson, chief business economist at S&P Global, the firm that compiles the bloc’s purchasing managers’ index (PMI) data.

“Increasingly widespread supply shortages meanwhile threaten to dampen growth further while adding more upward pressure to prices in the coming weeks.”

The jump in Brent oil prices to $103 in the commodity markets – and the read-across for inflation – meant the weak data didn’t have the usual impact on bond markets. [O/L]

Germany’s 10-year government bond yield rose 2.5 basis points to 3% and back toward the near 15-year high of 3.13% hit in late March.

Ukraine’s bonds rallied though as the European Union formally approved a promised 90-billion-euro loan for the country.

In Hungary, which had been blocking the money until Viktor Orban’s election loss earlier this month, it was also confirmed that Russian oil had begun flowing through the Druzhba ‘friendship’ pipeline again having been shut off for months due to damage in Ukraine.

HOT OIL, COOL CURRENCIES

Currencies were mostly calm, with the dollar holding onto small gains from overnight. The euro dipped to a 10-day low of $1.1689, having lost 0.3% overnight. [/FRX]

The risk-sensitive Australian dollar, which had been pushing higher in recent weeks, also slipped 0.2% to $0.7147.

“We are slightly in limbo because the geopolitical story could take a significant turn at fairly short notice,” Societe Generale’s Kit Juckes said.

“Until we get some clarity,” he added, “nobody is going to have the conviction to push things too far.”

Wall Street futures also skidded 0.5% as traders waited to see the latest reaction of U.S. President Donald Trump to the developments in the Gulf. [.N]

Trump’s first post of the day on the topic said he had ordered the U.S. Navy “to shoot and kill any boat” that is laying mines and that U.S. minesweepers were working “at a tripled up level” to clear any from the Strait.

On Wednesday, the S&P 500 had climbed 1% and the Nasdaq had jumped 1.6%, both notching fresh record-closing highs, helped by a strong start to the new earnings season. [.N]

Treasury yields – a proxy for the U.S. government’s borrowing cost – rose with oil prices though. The two-year U.S. Treasury yield steadied at 3.8% in European trading, while the 10-year yield increased to 4.3%.

MSCI’s broadest index of Asia-Pacific shares outside Japan had ended lower overnight despite briefly setting a new record high.

Japan’s Nikkei had done the same and finished down 0.75%, as did the high-flying tech-heavy markets in Taiwan and South Korea.

Higher oil prices were largely to blame, with Brent crude futures up 2.5% at nearly $105 a barrel at one point in London, having jumped 3.5% on Wednesday. [O/R]

In addition to Iran’s container ship seizures, the Washington Post reported that the Pentagon had signalled it could take six months to clear the Strait of Hormuz of mines.

“Geopolitics continues to dominate markets,” Jefferies economist Mohit Kumar said. “Relative to pre-war levels, oil is 32% higher, U.S. and German 10-year (government bond) yields are around 35 basis points higher.”

(Additional reporting by Stella Qiu in Sydney; Editing by Andrew Heavens)