SINGAPORE: Stocks were on tenterhooks and oil prices rose in choppy trade on Tuesday as U.S. President Donald Trump's postponement of the bombing of Iran's power grid proved no panacea for investors worried about the ramifications of the Middle East war.
U.S. Treasury yields pushed higher and the dollar regained lost ground, in a retracement of the relief rally that swept markets overnight after Trump added five days to his Saturday ultimatum for Iran to reopen the Strait of Hormuz within 48 hours, citing "productive" talks Tehran.
Much uncertainty remained as the world continues to grapple with an energy shock while Iran denied that it had engaged in negotiations with the U.S.
"The underlying situation is still incredibly fragile or flammable," said IG market analyst Tony Sycamore.
"It doesn't seem like all of the parties are on the same page... Trump can talk all he likes, but the Strait (of Hormuz) is closed and it's staying closed until all the Iranians get on the same page, and that's where we've got a problem."
Markets in Europe were set for a dour start, with EUROSTOXX 50 futures down 1% while FTSE futures lost 0.47%. S&P 500 futures fell 0.56% and Nasdaq futures shed 6%.
Asia shares, meanwhile, edged higher in a catch-up rally to global counterparts. MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.3%, while Tokyo's Nikkei advanced 0.95%. Hong Kong's Hang Seng Index added 1.6%.
Iran has launched waves of missiles at Israel, the Israeli military said, while Semafor reported, citing a U.S. official, that the U.S. will continue strikes on Iran, with a pause applying only to attacks on Tehran's energy sites.
With the war raging and shipments of about one-fifth of the world's oil and liquefied natural gas through the Strait of Hormuz still curtailed, oil prices resumed their climb on Tuesday.
Brent crude futures were up 3.6% to $103.58 a barrel, reversing some of their 10% slide from the previous session, while U.S. crude rose 4.12% to $91.76 per barrel.
"The war has resulted in lasting damage to infrastructure, so even if it's over soon energy prices may well remain higher - and bond and equity prices lower - for longer than they otherwise would have been," said Thomas Mathews, head of markets for Asia-Pacific at Capital Economics.
YIELDS RISE, DOLLAR PARES LOSSES
U.S. Treasury yields rose on Tuesday after a sharp fall overnight, as little clarity over an end to the conflict left traders pricing in a more hawkish global interest rate outlook.
The two-year yield jumped 7 basis points to 3.9015% in Asia, while the benchmark 10-year yield was up more than 4 bps to 4.3797%.
The inflationary pulse from energy has seen investors abandon hope for further monetary easing globally and swing to pricing in rate hikes across most developed nations.
The U.S. Federal Reserve is seen leaving rates on hold this year, with futures pointing to a small chance of a hike, while the Bank of England and European Central Bank are widely expected to raise rates.
"Unless the Strait (of Hormuz) is reopened very quickly, we are still more likely than not to see higher interest rates and a meaningful increase in oil importers' costs in the coming weeks," said Kit Juckes, head of FX strategy at Societe Generale.
The U.S. dollar, meanwhile, rebounded from its fall on Monday, pushing the euro down 0.24% to $1.1587, while sterling slid 0.5% to $1.3389.
The risk-sensitive Australian and New Zealand dollars fell more than 0.5% each.
In precious metals, spot gold was down 1.3% at $4,350.51 an ounce, pressured by expectations of higher-for-longer U.S. rates. - Reuters
