Iran-US tensions take the edge off world stocks rally

LONDON: World stocks fell on Friday, as worries about a threatened U.S. military strike against Iran and a global trade conflict took the edge off a central bank-induced rally from earlier in the week.
The New York Times said U.S. President Donald Trump approved military strikes against Iran on Friday in retaliation for the downing of an unmanned surveillance drone, then pulled back from launching the attacks.
Iranian officials told Reuters on Friday that Tehran had received a message from U.S. President Donald Trump through Oman warning that a U.S. attack on Iran was imminent.
Worries over possible military strikes persist, and the MSCI world equity index, which tracks shares in 47 countries, fell from a seven-week high, driven mostly by weakness in Asian stocks. A rally by European stocks also faded, though a pan-European index was higher on the day.
“ … Market risk hasn’t been switched off, it’s merely gone dim,” said Stephen Innes, managing partner at Vanguard Markets. “However, it does appear equity markets are tired and may be suffering from a bit of a hangover after partying it up to post FOMC.”
A Federal Reserve Open Market Committee meeting this week opened the door to rate cuts in the United States.
Earlier, MSCI’s broadest index of Asia-Pacific shares outside Japan lost 0.15%. The index was still up nearly 4% on the week, during which it reached its highest level since May 8.
The Shanghai Composite Index rose 0.5%, Australian stocks declined 0.6% and Japan’s Nikkei shed 0.8%.
The promise of rate cuts from both the Federal Reserve and the European Central Bank has kept sentiment strong in stock markets. Wall Street rose to record highs overnight, with the S&P 500 gaining nearly a percent.
But tensions remain elevated, and safe-haven gold advanced to a six-year high of $1,410.78 an ounce on Friday, boosted by the geopolitical tensions and the prospect of a U.S. rate cut. At one stage, gold was up nearly 5% on the week.
“While lower real rates in the U.S. and globally make gold more attractive, the metal is being increasingly viewed as a cardinal asset to hedge against the scrim of unpredictability like the fear of recession and war,” Innes said.
Meanwhile, China and the United States are set to resume trade talks before Presidents Donald Trump and Xi Jinping meet next week in Japan. Hopes of an agreement grew after the two leaders talked by telephone call, but neither side has signaled a shift from positions that led to an impasse last month.
The Fed’s signal that rate cuts were likely brought some relief, but also raised the specter of a global currency war.
On Friday, the dollar fell against a basket of six major currencies to a two-week low of 96.495. The index has shed roughly 1% this week.
The dollar has fallen 1.35% versus the yen this week, reaching a six-month low of 107.045 yen on Friday.
In oil markets, U.S. crude oil futures were up 0.46% at $57.33 per barrel. They had surged more than 5% the previous day after Iran shot down the U.S. drone.
The benchmark S&P 500 index hit a record high as an almost giddy euphoria over the prospects of a U.S. interest rate cut fueled the appetite for equities, but there are plenty of pitfalls that could throw the stock market off course. From the high expectations for something positive on the U.S.-China trade front at next week’s Group of 20 summit, to rising geopolitical concerns and a worrying U.S. profit picture, the potential for missteps and stumbles is great.
Moreover, the rally appears to be based more on hope than reality, strategists said.
“This is probably one of the riskiest points you’re ever going to see in the stock market,” said Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut. “The price level here is not supported by fundamentals. It’s supported by sentiment and hype and hopefulness about monetary policy.”
The S&P 500 finished at a record closing high and the 10-year Treasury yield dipped below 2% for the first time in more than 2-1/2 years a day after the Federal Reserve signaled the potential for a rate cut as soon as its next meeting in July as it said it was ready to battle risks to the economy, including the U.S.-China trade war.
There were other signs of the risk-on sentiment driving the market. Though it rose slightly, the Cboe Volatility index, known as Wall Street’s favorite fear gauge, is near its lowest level since early May. And Apple Inc, a technology bellwether, briefly hit $200 a share for the first time since early May, though the iPhone maker is viewed as a major potential casualty in Trump’s trade war, should it worsen.
O’Rourke warned that some factors are a double-edged sword. While the market has embraced potential rate cuts, there is a downside to such cuts because they would be more likely if economic conditions deteriorate further, which is also a risk for stocks, he said. On the other hand, a trade deal with China may reduce the need for a Fed rate cut.
The recent gains in stocks follow a sharp selloff in May amid an escalation in the trade dispute between the world’s two biggest economies, which stoked fears of a global economic slowdown.