Stocks gain as oil prices moderate gains; focus turns to Fed
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NEW YORK, March 17 : Global stocks advanced on Tuesday for a second straight session, even as the war in Iran kept driving up oil prices and ahead of a flurry of policy announcements from global central banks this week.
Israel said it killed Iran's security chief, while a senior Iranian official said the new supreme leader rejected de-escalation offers conveyed by intermediaries.
President Donald Trump told reporters the United States is not ready to leave the military operation in Iran yet, but that "we'll be leaving in pretty much the very near future."
U.S. crude settled up 2.9 per cent to $96.21 a barrel and Brent climbed 3.2 per cent to settle at $103.42 per barrel, supported by Iranian attacks on the United Arab Emirates that stoked supply fears while the Strait of Hormuz remained largely shut. Both contracts were off earlier gains of about 5 per cent but remained up more than 40 per cent for the month.
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MAJOR S&P SECTORS ADVANCE
On Wall Street, U.S. stocks closed higher, led by a 1 per cent rise in the S&P 500 energy index. Despite rising fuel costs, airline and travel stocks also advanced after Delta Air and American Airlines flagged strong spring demand while investor focus turned to the Federal Reserve's policy announcement on Wednesday.
"The place where we could get in trouble with this is if the Fed views the oil shock as inflationary and decides to respond with more hawkish monetary policy," said Ross Mayfield, an investment strategist at Baird Private Wealth Management." The best-case scenario would be some confirmation tomorrow (Wednesday) that the Fed is monitoring the situation, but kind of adheres to what they've done in the past, which is try to look through big oil shocks."
The Dow Jones Industrial Average edged up 47.40 points, or 0.10 per cent, to 46,993.81, the S&P 500 rose 16.75 points, or 0.25 per cent, to 6,716.13 and the Nasdaq Composite climbed 105.35 points, or 0.47 per cent, to 22,479.53.
MSCI's gauge of stocks across the globe rose 5.19 points, or 0.51 per cent, to 1,013.34 and was poised for its first back-to-back daily gains in three weeks, while the pan-European STOXX 600 closed up 0.67 per cent, buoyed by energy and utilities stocks.
Stocks have struggled since the war in Iran started. HSBC global equity strategist Alastair Pinder said in a note that while "talk of a shift toward stagflation is building" the recent action in equity markets "is more indicative of trading for a recessionary outcome."
The jump in oil prices and its potential to boost inflation have prompted markets to adjust expectations for easing by global central banks this year.
Markets are pricing in about 26 basis points of cuts from the U.S. Federal Reserve by year-end, down from more than 50 basis points earlier this week, and 36 basis points of hikes from the European Central Bank after pricing in a modest chance of a cut as recently as February, according to LSEG data.
While investors were largely not pricing in any cuts from the Fed at Wednesday's policy announcement, the timing of any future reductions has been pushed further out this year.
Stock markets rallied on Monday as oil prices dipped on hopes shipping flows from the Gulf would improve and optimism about artificial intelligence lifted U.S. tech companies.
CENTRAL BANKS GRAPPLE WITH ENERGY PRICES
The Reserve Bank of Australia voted on Tuesday to hike interest rates for a second straight month, taking its benchmark rate to 4.1 per cent and warning of a material inflation risk from the Iran war.
Goldman Sachs analysts said the risk of a third straight hike is "material" but not their base case.
The move set the tone ahead of policy statements this week from central banks in the United States, Britain, euro zone, Japan, Canada, Switzerland and Sweden, all of which will meet for the first time since the start of the Iran war. Investors will look for clues on how higher crude prices could influence the rate outlook.
The Fed is widely expected to hold rates steady, and policymakers are likely to strike a cautious, if not hawkish, tone due to the current oil shock.
The shifts in central bank expectations have led to large moves in government bonds recently, although that market was subdued on Tuesday.
The yield on benchmark U.S. 10-year notes fell 1.8 basis points to 4.202 per cent but is up about 24 basis points for March. The two-year note yield, which typically moves in step with Fed rate expectations, fell 0.9 basis point to 3.672 per cent but is up nearly 30 basis points for the month.
The dollar index, which measures the greenback against a basket of currencies, shed 0.27 per cent to 99.59, with the euro up 0.28 per cent at $1.1535.
Against the Japanese yen, the dollar weakened 0.02 per cent to 159.03, just below the key 160 level that has previously triggered interventions by the Bank of Japan, despite verbal warnings from Japanese authorities on Tuesday.
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