Dollar and oil rise, stocks slide as US-Iran peace talks collapse

LONDON/SINGAPORE – Oil and the dollar jumped on Monday as the failure of US-Iran talks to yield an agreement left a fragile ceasefire hanging in the balance and no end to a choke on Mideast energy exports.

Stocks were set to fall in Asia and S&P 500 futures dropped around 1.1% in early trade. Benchmark Brent crude futures opened about 7.5% higher at USD 102.37 a barrel.

The euro fell about 0.5% to USD 1.1672.

Marathon talks in Islamabad ended in a stalemate, and US President Donald Trump on Sunday said the US Navy would itself start blockading the Strait of Hormuz.

Iran has effectively closed the choke point for 20% of the world’s daily energy supplies since the war started in late February, driving up oil prices by more than 30% and fuelling fears of a surge in inflation that has whacked bond markets.

US Treasury futures sank in early trade, and gold, which has been a loser as investors have cashed out profits from its long pre-war rally, fell almost 2%.

“This is an absolute unwinding of any optimism heading into the peace talks into that play of dollar: safe-haven; oil jumping and selling out of everything else,” City Index senior market analyst Fiona Cincotta said.

“On the other hand, we have seen the markets over-exaggerate sometimes. And I think especially around this scenario, the market is struggling to really price it correctly, because there is so much uncertainty, so many unknowns.”

Moves early on Monday dragged many asset prices back near where they had traded in the middle of last week, before the US and Iran struck a two-week ceasefire deal.

“The market is now largely back to conditions before the ceasefire, except now the US will block the remaining up to (2 million barrels) Iranian-linked flows through the Strait of Hormuz as well,” said Saul Kavonic, MST Marquee analyst in Sydney.

“The key remaining question is if the US renews strikes on Iran, raising the risk of strikes on energy infrastructure across the region, which could have a further lasting impact beyond the duration of the war.”

The Wall Street Journal reported that Trump and his advisers were now weighing limited strikes on Iran.

Risk-sensitive currencies such as the Australian dollar and sterling came under pressure, falling 0.7% and 0.5%, respectively. The dollar rose 0.3% to 159.78 yen JP.

With expectations building for a resurgence in inflation, investors have priced in the possibility of several central banks, such as the European Central Bank and Bank of England, leaning towards raising interest rates this year, in stark contrast with pre-war expectations for cuts or steady rates.

Global equities, which ended last week around their highest since early March, buoyed by optimism that the United States and Iran were heading towards some kind of resolution, are still 2% below where they were prior to the war breaking out.

Trump said on Sunday that the price of oil and gasoline ​may remain high through November’s midterm elections, a rare acknowledgement of the potential political fallout from the war.

(Additional reporting by Scott Murdoch in Sydney; Editing by Vidya Ranganathan, Aurora Ellis, and Deepa Babington)