LDN - Business

Shares wilt as Middle East tension heats up crude oil

[April 05, 2024] By Huw Jones

LONDON (Reuters) - Global shares retreated on Friday as geopolitical tension kept crude oil above $90 a barrel ahead of U.S. payroll numbers, and hawkish central bankers raised doubts about the pace and timing of interest rate cuts.

The threat of supply disruptions from prolonged conflict in the Middle East kept Brent oil futures above $90 a barrel, a level not seen since last October, with prices heading for their second weekly gain. [O/R]

The dollar firmed against peer currencies after rebounding from a two-week low, while gold's rally to record highs on Thursday came to a halt ahead of the U.S. payroll numbers.

The MSCI All Country stock index was down 0.3% at 770.7 points as it continues to ease in the first week of the quarter after hitting a lifetime high at 785.62 points on March 21.

In Europe, the STOXX index of 600 companies dropped 1.2% to 504.7 points, after Tuesday's lifetime high of 515.77 points.

A cooling U.S. services sector and comments this week from Fed Chair Jerome Powell reinforced the view that rate cuts were likely to commence at some point this year.

However, some other Fed officials have taken a more conservative view, with Minneapolis Fed President Neel Kashkari, in particular, striking a more hawkish stance overnight, saying rate cuts might not be required this year if inflation continues to stall.

"It's the first time I've heard those kind of statements, so the markets sold off, and at the same time we had a flare-up in geopolitical tensions in the Middle East," said Mark Ellis, CEO of Nutshell Asset Management.

So far, however, there appears to be a healthy pullback in markets that had been grinding higher in a very tight trendline, making it look a bit stretched as investors ready for important U.S. payroll numbers, Ellis said.

He pointed to a jump in the VIX, Wall Street's 'fear gauge', which posted its highest close since Nov. 1.

"It suggests we are at a bit of a turning point now, whether this is a natural pullback in a bull market, or whether it's going to turn into something a little bit more," Ellis said.

U.S. non-farm payroll numbers for March are due before the opening bell on Wall Street, with economists expecting a rise of 200,000, compared with 275,000 in February, while the unemployment rate is likely to keep steady at 3.9%.

"We think a print below 200,000 should put pressure on the dollar, endorsing the recent signs that the employment story is softening and that the Fed will be in a comfortable position to start cutting in the summer," ING bank analysts said in a note.

U.S. stock index futures,, were trading firmer, recovering some ground after the three key indexes fell more than 1% each on Thursday on hawkish Fed comments and Middle East tension.

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The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, April 2, 2024. REUTERS/StaffFile Photo

MIDDLE EAST TENSION

Markets digested news that Israel braced on Thursday for a possible retaliatory attack after its suspected killing of Iranian generals in Damascus this week, and Prime Minister Benjamin Netanyahu said the country would harm "whoever harms us or plans to harm us".

In a later call with Netanyahu, U.S. President Joe Biden threatened to condition support for Israel's offensive in Gaza on it taking steps to protect aid workers and civilians.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.45%, tracking a late tumble on Wall Street as risk aversion dominated the market mood. The index was set to end the week little changed.

A holiday in China also made for thinner trade.

Tokyo's Nikkei fell 2%, pressured in part by a stronger yen, thanks to the prospect of further rate hikes there and more jawboning from Japanese officials. [.T]

Hong Kong's Hang Seng Index edged down 0.6%.

Fed officials' comments supported the dollar against a basket of currencies, lifting it away from a two-week low hit after a downbeat U.S. services survey.

The euro was steady, and the yen rose to a two-week high.

Fed fund futures point to just under 75 basis points worth of easing this year, closer in line with the Fed's projections and a significant pullback from nearly 160 bps worth of cuts priced in at the start of the year.

That shift has left U.S. Treasuries struggling, with the 10-year yield hovering near its highest in more than three months, last at 4.321%. [US/]

The two-year yield firmed at 4.6520%. Bond yields move inversely to prices.

In commodities, Brent edged up to $90.78 a barrel, after striking a more than five-month high on Thursday.

U.S. crude eased a touch to $86.51 per barrel.

Gold retreated from a record high and was last slightly lower at $2,288 an ounce. [GOL/]

(Reporting by Rae Wee; Editing by Tom Hogue and Clarence Fernandez)

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