LONDON/SYDNEY — Share markets sagged on Thursday (April 9) as cracks quickly began to appear in the fragile Gulf truce, nudging oil prices back up toward US$100 (S$128) a barrel and reminding investors the inflationary fallout would last a long while yet.
Crucially, there was scant sign that the Strait of Hormuz was open in any meaningful way, with Iran flexing its control over the vital oil artery and demanding tolls for safe passage.
President Donald Trump took to social media to declare US forces would remain in the Gulf until a deal was reached and complied with, otherwise the "'shootin' starts,' bigger, and better, and stronger than anyone has ever seen before".
Meanwhile, Israel has carried out its heaviest strikes on Lebanon since its conflict with Iran-backed Hezbollah militia began last month, killing more than 250 people on Wednesday.
As a result, Brent crude futures rose 2.5 per cent to US$97.28 a barrel, US WTI futures bounced 3.3 per cent to US$97.55 and the pan-European STOXX 600 index opened 0.2 per cent lower having leapt 3.7 per cent on Wednesday following the ceasefire announcement.
UBP's Head of Investment Services UK Peter Kinsella said the moves showed markets remained focused on trading headlines, although apart from the big swings in oil prices, he stressed volatility in most of the main currencies was still limited.
"It is very difficult for investors as they are dealing with a conflict where the protagonists don't even know what they want," Kinsella said.
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Europe's government bond yields — which drive the cost of borrowing — were also nudging higher again in early trading having plunged on Wednesday.
Data from Germany showed industrial production fell unexpectedly in February, showing Europe's largest economy was subdued and on course for another quarter of contraction even before the Iran war.
Overnight in Asia, Japan's Nikkei had ended 0.7 per cent lower after jumping 5.4 per cent the previous session.
South Korea dipped 1.6 per cent, following a leap of 6.8 per cent.
Chinese blue chips also slipped 0.6 per cent, while MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.7 per cent.
On Wall Street, S&P 500 futures and Nasdaq futures were both off around 0.4 per cent ahead of their restart later.
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With oil prices still around 40 per cent higher than pre-conflict, an inflationary spike is about to show up in the hard data across the globe.
Figures on US core prices for February due later Thursday are expected to show a chunky 0.4 per cent rise for a second month, and that was before the surge in energy costs.
State Street's PriceStats' inflation metrics meanwhile show March has seen the biggest month-on-month increase in prices since at least 2008 when its data series began, according to its head of Macro Strategy Michael Metcalfe.
Minutes from the Federal Reserve's last policy meeting on Wednesday showed a growing number of members felt a rate hike might be needed to contain inflation, though many hoped the next move would still be a cut.
That tempered a rally in Treasuries, which proved modest compared to the big gains seen in European debt markets on Wednesday.
Yields on US 10-year notes sat at 4.296 per cent, compared to 3.96 per cent before the attack on Iran.
Fed fund futures imply only six basis points of easing for the rest of this year, having given up on 50 basis points of cuts since the end of February.
Europe's money markets though still, by contrast, price in at least two European Central Bank rate hikes this year.
"The committee broadly agreed that it was too early to act, suggesting the Fed will likely remain on hold this year, in line with our view," said analysts at JPMorgan in a note.
The shifting outlook for rates saw the dollar pare some of its knee-jerk losses, with the dollar index at 99.06 and the euro flat at US$1.1660 and off its previous day's top of US$1.1721.
The dollar inched up to 158.93 yen (S$1.27), having fallen as far as 157.89 at one stage on Wednesday.
In commodity markets, gold inched back to US$4,713 an ounce, after bouncing as high as US$4,777 while European natural gas prices rebounded to 45.65 euros per megawatt hour although the move was far more modest than in oil markets.
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