Investors’ hopes of seeing a de-escalation in the US-Iran conflict were dashed after President Donald Trump’s national address on Thursday. Moving away from ceasefire talks, Trump pledged a more aggressive military campaign in the coming weeks. The harsh statement sparked panic on Wall Street and global financial centers, forcing investors to flee stock markets and seek refuge in the US dollar.
Following the speech, the US Dollar Index recorded its best daily jump in two weeks, jumping to 100.24. Major world currencies such as the Euro and Pound Sterling had to give up previous gains, while the Australian Dollar, often a barometer of global growth, fell almost 1% as the market predicted a significant economic slowdown due to the prolonged disruption of the war.
In the commodity market, Brent oil prices jumped almost 8%, returning to near $110 a barrel. Trump's failure to provide a timeline for the opening of the Strait of Hormuz has confirmed concerns that the world's energy supply chain will continue to be disrupted. Currency strategists say the market is now "realizing" that a more devastating phase of the war may have just begun, replacing the false optimism of a few days ago.
Japan is in a state of anxiety as the Yen has fallen to 159.72 per dollar. The 160 level is considered a "red line" that could force the government to intervene in the market to save the value of their currency. The Yen's weakness reflects the widening gap between Japanese and US monetary policy, which is now affected by the risk of energy inflation.
The rise in oil prices also has major implications for the Federal Reserve's (Fed) interest rate policy. US bond yields have risen as investors expect high inflation to force the Fed to keep interest rates high for a longer period. Hopes for a rate cut in the near future are now fading, adding to the burden on borrowers and companies around the world.
The market is now in a very uncertain state ahead of the NFP report on Friday. With 60,000 jobs expected to grow, any disappointing numbers could confirm fears of “stagflation” – a condition where the economy is in recession and prices continue to rise. Investors are expecting choppy trading ahead of the Easter weekend.
