By Ankur Banerjee and Gregor Stuart Hunter
April 2 (Reuters) – President Donald Trump’s threat to bomb Iran back to the Stone Age has sharply raised stakes in a war now in its fifth week and crushed investors’ hopes for a swift end to a conflict that is squeezing oil supplies and fanning inflation.
Global markets recoiled on Thursday as war jitters over Iran deepened, with stocks and bonds sliding, oil surging and the dollar firming after Trump dashed hopes for clarity on when the Middle East conflict might end.
Trump said that the U.S. military had nearly accomplished its goals in Iran, but he did not offer a concrete timeline for winding down the conflict. He said the U.S. would continue to hit targets in Iran over the next two to three weeks.
Those comments did little to convince jittery investors that an end to the Middle East conflict was close.
“I don’t think there was an awful lot in the speech per se, apart from the fact that they’re going to keep bombing for the next two to three weeks,” said Mike Houlahan, director of Electus Financial Ltd in Auckland.
“That pushes out the resolution timeframe farther,” he said. “The next question is because he’s extended it, confirmed it’s going to take another two to three weeks, does that put added pressure on the fuel supply chain?”
BIG LETDOWN FOR INVESTORS
Investors had pinned their hopes of an end to the conflict after comments from Trump earlier in the week, lifting global stocks and pushing the dollar off its recent highs but Thursday’s speech laid bare the reality of a long war.
That meant traders who had been adding risk exposure were swiftly exiting those positions ahead of a long weekend.
Oil supply disruption and its impact on inflation have been a major concern for financial markets, and Trump’s comments on Wednesday were not clear about whether U.S. military operations could end even before Iran reopened the Strait of Hormuz.
That vital waterway on which the Islamic Republic has a chokehold has created the worst global energy shock in history. The Brent contract for June jumped about 5% to $106.16 per barrel after Trump’s speech.
“With no plans to reopen the Strait of Hormuz that he effectively closed, oil prices are to remain high indefinitely,” said Matt Simpson, senior market analyst at Stonex in Brisbane, and markets will have to face “the next round of inflation”.
Trump’s speech and prospects of prolonged disruption to oil supplies could add to market concerns over stagflation, the toxic mix of high inflation and weak growth that roiled markets in March, analysts said.
Japan may face stagflation risks from the Iran war that would be challenging to deal with using monetary policy, new Bank of Japan board member Toichiro Asada said on Wednesday.
“The key question in all investors’ minds is ‘when is this going to be over?’, that is what is creating the volatility,” said Russel Chesler, head of investments and capital markets at Vaneck in Sydney.
“We are looking at a situation now where we are getting into a stagflation situation with lower growth and higher inflation expectations.”
Treasury yields rose in Asia on Thursday on concerns that higher inflation would close the door to any prospect of easier monetary policy. Yields on 10-year notes climbed 5 basis points to 4.376% after Trump’s speech.
While the overall markets are expected to remain volatile as investors keenly watch developments over the next two to three weeks, analysts expect the U.S. dollar and oil to move higher in the near-term, while investors go into risk-off mode.
The dollar, which has benefited from a rush to safe-haven assets since the conflict began in late February, advanced against major currencies on Thursday, reversing two days of losses.
“The dollar has already edged a little bit higher … and I think given our expectations for the war to extend into at least June, the dollar can definitely increase further,” said Carol Kong, currency strategist at Commonwealth Bank of Australia.
“It’s hard to feel optimistic about the end of the war for sure, because ultimately Israel and Iran are the two other parties to the war; it’s not just the U.S.”
(Reporting by Ankur Banerjee, Jiaxing Li, Scott Murdoch and Gregor Stuart Hunter; Writing by Sumeet Chatterjee; Editing by Sam Holmes)
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