Equities drop, oil rallies with Iran-US tensions and high inflation in focus
Market Reactions to Geopolitical Tensions and Inflation Data
(Corrects U.S. crude closing price to $90.03, not $98.03, in paragraph 5)
By Sinéad Carew and Tom Wilson
Equities and Oil Markets Respond to Iran-US Developments
NEW YORK/ LONDON, June 10 (Reuters) - MSCI's global equities index fell 1.5% on Wednesday after economic data showed U.S. inflation was high but in line with expectations and oil prices rose as hopes for Middle East peace progress dwindled after Iran and the United States exchanged strikes and threats.
Oil prices extended gains after U.S. President Donald Trump threatened that the United States would attack Iran "very hard" if no peace deal is finalized. Earlier, Trump wrote in a social media post that Iran would "pay the price" after taking too long to negotiate.
After Fox News reported that Trump is considering ordering new strikes on Iran's power plants and bridges, Iran's president said that such threats were a sign of desperation rather than a show of strength. Also, U.S. Energy Secretary Chris Wright told a congressional hearing on Wednesday that he's not aware that the U.S. has taken millions of barrels of oil out of Iran after Trump told reporters it had.
As the Iran war uncertainty drove up oil prices, in turn a selloff in equities deepened along with a continued unwinding of the AI trade, according to Michael O'Rourke, chief market strategist at JonesTrading in Stamford, Connecticut.
U.S. crude settled up about 2.1% at $90.03 a barrel while Brent settled at $93.10 per barrel, up 1.8%.
"Oil prices have shifted from anxiety to apathy and back again amid renewed skirmishes between the U.S. and Iran," Phil Flynn, senior market analyst at The Price Futures Group, said.
Inflation Data and Federal Reserve Outlook
Investor reactions were more modest earlier in the day after an economic release showed U.S. consumer inflation rose last month at its fastest pace since April 2023. The Labor Department's Bureau of Labor Statistics reported a 4.2% increase in the Consumer Price Index in the 12 months through May.
Traders maintained bets that the Federal Reserve would hold rates steady after its June 17 meeting and priced in a nearly 43% probability of a 25-basis-point hike versus a less than 32% chance rates would stay unchanged by December, according to CME Group's FedWatch tool.
Steve Kolano, chief investment officer at Integrated Partners, said that the report "doesn’t do anything to reduce the probability of a possible rate hike at some point this year" with energy prices high and the Iran conflict still unresolved.
Energy Prices and Geopolitical Risks
Elevated inflation highlights the need for a resolution in Iran so that oil and liquefied natural gas shipments can resume through the Strait of Hormuz, said Brian Jacobsen, chief economic strategist at Annex Wealth Management.
"The clock is ticking loudly to get the Strait of Hormuz open, either through force or through a truce. The Fed isn’t going to try to guess when that will happen, so President Trump needs to deliver them certainty before they meet," Jacobsen said.
Wall Street and Global Market Performance
Major Indices and Volatility
WALL STREET SLIDES
On Wall Street, the S&P 500 declined 1.62% to end the session at 7,266.99 points. The Nasdaq declined 1.98% to 25,169.50 points, while the Dow Jones Industrial Average declined 1.87% to 49,918.78 points.
MSCI's gauge of stocks across the globe fell 16.44 points, or 1.49%, to 1,086.98.
The pan-European STOXX 600 index closed down 0.08% after paring earlier losses.
Overnight, MSCI's broadest index of Asia-Pacific shares outside Japan had fallen 2.3% while the tech-heavy South Korean KOSPI lost 4.5% as AI stocks came under pressure.
The CBOE volatility index .VIX, sometimes referred to as Wall Street's fear gauge, rose on Wednesday to 22.22 but stayed below its Tuesday intraday peak of 23.34, which was its highest level since April 7.
Currency and Bond Markets
In currencies, the dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was near flat at 100.01, with the euro down 0.03% at $1.1539.
Against the Japanese yen, the dollar strengthened 0.1% to 160.52, staying near the 160-level widely seen as the trigger for potential official intervention. Japan's wholesale inflation accelerated in May at the fastest pace in three years as price pressures from the war broadened, data showed on Wednesday, adding to the case for further interest rate hikes by the Bank of Japan.
In government bonds, the yield on benchmark U.S. 10-year notes rose 2 basis points to 4.548%, from 4.528% late on Tuesday.
The 30-year bond yield rose 1.7 basis points to 5.0282% from 5.011% late on Tuesday.
The 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, rose 1.5 basis points to 4.139%, from 4.124% late on Tuesday.
Precious Metals
Among precious metals, gold trading was choppy after the inflation data and lost ground further on Middle East uncertainty. Spot gold fell 4.32% to $4,078.49 an ounce.
(Reporting by Sinéad Carew, Laura Matthews, Siddharth Cavale in New York, Tom Wilson in London and Ankur Banerjee in Singapore; Additional reporting by Noel Randewich in San Francisco; Editing by Edwina Gibbs, David Holmes, Chizu Nomiyama and Barbara Lewis)
