Yen at 159/dollar, keeping investors nervous about intervention
The worry for investors remains the near closure of the Strait of Hormuz, a critical artery for the world’s energy supplies, that has sent oil prices soaring and rewired the global interest rate outlook because of inflationary concerns.
US Secretary of State Marco Rubio said there had been “some good signs” in talks to end the nearly three month old war in the Middle East but differences remain over Tehran’s uranium stockpile and controls over the waterway.
In stock markets, MSCI’s broadest index of Asia-Pacific shares outside Japan was 0.3% higher, set for a modest weekly rise. Japan’s Nikkei gained 2%.
US stocks futures EScv1 rose 0.2% and European futures STXEc1 gained 0.8%.
Chris Weston, head of research at Pepperstone, said it increasingly feels as though the news flow is gradually trending towards something tangible that markets can ultimately price with greater conviction.
“Although confidence levels are still not especially high,” Weston cautioned.
Oil prices rose in early trading on Friday after dropping sharply as conflicting messages on the talks keep investors guessing. They remain well above pre-war levels where they are expected to remain even if a resolution is announced.
Brent crude futures LCOc1 rose 2% to US$104.71 a barrel but were set for a 6% drop in the week. US West Texas Intermediate futures CLc1 were up 1.66% at US$98.01.
Prolonged energy disruptions as the war drags on threaten to feed through to prices across the globe, spurring traders to price in rate hikes in developed and emerging markets.
Markets are now pricing in possible rate hikes from the US Federal Reserve by the end of the year versus expectations of two rate cuts before the war.
“We’re seeing an unusually strong linkage between oil prices and global rates, reflecting how broad-based and borderless this shock has become,” said Mitch Reznick, Head of Fixed Income at Federated Hermes.
“What initially appeared to be a shift in inflation expectations is now feeding directly into realised inflation, reinforcing the view that central banks will need to keep policy tighter for longer to restore price stability.”
That has lifted Treasury yields and boosted the dollar, which also benefits from safe-haven demand. The euro was at US$1.1614 in early trading, close to the six week low it hit on Thursday, set for a 1% drop this month.
Against a basket of currencies, the dollar was at 99.247. The Japanese yen last fetched 159.11 per US dollar.
Data on Friday showed Japan’s core inflation slowed to four-year low in April, complicating the outlook for the Bank of Japan’s rate-hike path.