Global equities regained footing on Wednesday after a fleeting dip in oil prices, but market participants remained cautious as intensive strikes involving the United States, Israel and Iran complicated the outlook for inflation and growth.
The brief easing in crude came after a Wall Street Journal report said the International Energy Agency has proposed the largest release of oil reserves in its history to curb rising prices. That prospect offered momentary relief for damaged global stocks, even as currencies and bond markets showed little movement.
Brent crude futures oscillated between gains and losses and were trading 0.2% higher at $87.89 per barrel, while U.S. crude was essentially unchanged at $83.47 a barrel after initially retreating on the report.
Geopolitical backdrop keeps markets uneasy
Investors’ nerves were not fully calmed by the potential reserves release. The conflict in the Middle East intensified as the United States and Israel carried out what some observers described as the most severe airstrikes of the campaign, undermining hopes that hostilities might be close to an end.
Frank Benzimra, head of Asia equity strategy and multi-asset strategist at Societe Generale, said the reserve release proposal was welcome because it could prevent rationing or wider economic fallout if the conflict is short-lived. He added, however, that uncertainty will persist, calling the situation "very, very unpredictable."
Equities: selective gains across Asia and futures
Despite the underlying risks, equity indices saw gains. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1.6%, while Japan’s Nikkei climbed 2.1%. South Korea’s Kospi advanced 3.2%.
U.S. stock futures also moved higher after a mixed cash session overnight, with Nasdaq futures and S&P 500 futures each adding 0.4%. In contrast, EUROSTOXX 50 futures slipped 0.3%.
Energy markets and structural concerns
Market commentators highlighted several structural questions that will determine oil’s path. Kerstin Hottner, head of commodities at Vontobel, flagged the timing for when vessels can safely transit the Strait of Hormuz as a central uncertainty, noting the chokepoint’s importance for global supply. She also pointed to the risk of infrastructure damage and cautioned that even if large-scale hostilities ease, persistent, lower-level Iranian drone strikes on energy infrastructure could sustain market instability into the next year.
These comments underline how energy markets remain highly sensitive to both the intensity and the expected duration of the conflict.
Dollar outperforms as safe-haven preference
The U.S. dollar held its gains on Wednesday as investors continued to process the geopolitical fallout, with the greenback serving as the primary safe-haven asset in the current turbulence. Against the yen, the dollar was up 0.1% at 158.25. The euro and sterling were trading lower at $1.1624 and $1.3440, respectively.
Benzimra noted that the dollar has taken the lead as the dominant safe asset. He observed that traditional safe havens such as gold and U.S. Treasuries have not played that role as strongly in this episode - Treasuries have been less attractive amid inflation concerns, while some investors may be liquidating gold gains to offset equity losses.
Bonds and central bank implications
Bond markets have been under pressure in recent sessions due to concerns that a sustained rise in energy prices could fuel inflation and prompt central banks to adopt a more hawkish stance. On Wednesday, U.S. Treasuries were steady: the benchmark 10-year yield was little changed at 4.1460%, while the two-year yield stood at 3.5796%.
Thierry Wizman, global FX and rates strategist at Macquarie Group, said central banks are likely to maintain a hawkish tone while the inflationary threat from the war persists. He added that this stance may continue even after hostilities subside, on the basis that inflationary pressures could continue to appear in economic data during the period when higher prices filter through.
Data watch and commodities
Market attention was also turning to February’s U.S. inflation reading, due later on Wednesday, as investors sought guidance on how price dynamics were evolving amid the conflict.
In precious metals, spot gold was up 0.5%, trading at $5,215.60 an ounce.
While the IEA’s proposed release of strategic stockpiles offered a temporary easing in oil prices and a modest boost to risk assets, the deeper uncertainty around the conflict’s trajectory - including risks to shipping through the Strait of Hormuz and potential damage to energy infrastructure - means that markets remain on edge. The interplay between energy price developments, inflation data and central bank policy will be key to how equities, bonds and currencies perform in the coming weeks.