Oil rebounds, global stocks relief stalls amid doubts over Mideast truce

Global share markets sagged on Thursday as cracks quickly began to appear in the fragile Gulf truce, nudging oil prices back up toward $100 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 the Iran-backed Hezbollah militia began last month, killing more than 250 people on Wednesday.

European and African crude oil prices climbed to fresh records on Wednesday, defying a sharp selloff in oil futures after a US-Iran ceasefire was reached on Tuesday, as traders priced in a prolonged disruption to physical oil supplies.

The ceasefire announcement sent major benchmark Brent and WTI contracts tumbling 13% and 16% respectively on Wednesday to below $100 a barrel, as investors bet on the reopening of the Strait of Hormuz and a reduced geopolitical risk premium.

However, prices in the physical market have yet to decline and some have even risen. The outright price of a barrel of North Sea Forties crude FOT-E, opens new tab reached an all-time high ⁠of $146.43 a barrel on Thursday, according to LSEG data.

The divergence highlights strong from Asian and European refiners for non-Middle East barrels, driving up prices for prompt replacement crudes, such as those in Europe and Africa. It also shows that disruption is expected to persist.

On Thursday, in line with European and African anxieties, Brent crude futures also rose almost 3.5% to $98 a barrel, US WTI futures bounced 4.6% to $98.88, Wall Street futures were down and the pan-European STOXX 600 index .STOXX was 0.5% lower having seen its biggest one-day gain since 2022 on Wednesday when it leapt 3.7%. O/R.

UBP's Head of Investment Services UK Peter Kinsella said the moves showed markets remained focused on headlines, although apart from the big swings in oil prices, he said that volatility in most of the main asset classes 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.

Spluttering Germany

Government bond yields - which drive the global cost of borrowing - were also shifting higher again having plunged on Wednesday.

German 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% lower after jumping 5.4% the previous session. South Korea .KS11 dipped 1.6%, following a leap of 6.8%.

Chinese blue chips .CSI300 also slipped 0.6%, while MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS eased 0.7%.

On Wall Street, S&P 500 futures ESc1 and Nasdaq futures NQc1 were both off around 0.3% ahead of their restart later.

Inflation is inevitable

With oil prices still around 40% higher than pre-conflict, an inflationary spike is about to show up in the hard data across the globe.

The PCE index of US core prices for February published ahead of the Wall Street open rose 2.8% on an annual basis and 3% excluding the volatile food and energy components. The index is the Fed's preferred inflation gauge.

Both figures were in line with economists' forecasts although a separate report showed the US economy grew 0.5% in the fourth quarter compared with estimated growth of 0.7%.

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 with the big gains seen in European debt markets following the ceasefire announcement. Yields on US 10-year notes were at 4.296% in early US trading, compared to 3.96% before the attack on Iran.

Fed fund futures 0#FF: imply only 6 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 price in at least two ECB rate hikes this year.

"When you look at bond prices it's still very much oil-driven," said Michiel Tukker, senior UK and euro zone rates strategist at ING, adding that markets were struggling to price the complexities of the situation, instead sticking to the "where's oil?" playbook.

The shifting outlook for rates saw the dollar pare some of its knee-jerk losses, leaving the dollar index .DXY drifting around the 99 level and the euro at $1.1681 EUR=EBS compared to the previous day's top of $1.1721.

The dollar did inch back above 159 yen JPY=EBS though, having fallen as far as 157.89 at one stage on Wednesday.

UBP's Kinsella said he was still grappling with why Japan's central bank hadn't intervened yet given the yen's persistent weakness.