Oil surges, US futures drop after strikes on Iran

Global crude benchmark Brent jumped about 2.6% after surging as much as 5.7%.

US stock-index futures dropped and oil advanced early Monday in Asia following US strikes on Iran’s nuclear sites over the weekend.

Asian equities fell.

Contracts for the S&P 500 declined around 0.3%. Global crude benchmark Brent jumped about 2.6% after surging as much as 5.7%. The dollar climbed against the euro and most major peers. Equity indexes in Japan and Australia fell less than 1% while Treasuries were little changed.

The price action reflected typical risk-off positioning, though the moves moderated larger swings when markets initially opened in a sign traders are waiting for further signs of escalation in the conflict.

“The key theme will be volatility — the moves might not stick if, for example, President Donald Trump decides the strikes are done,” said Nick Twidale, chief analyst at AT Global Markets. “Trump has the bigger stick compared with Tehran, and as such his next move — be it a further escalation or heading back to the negotiating table — will matter more for markets.”

The strikes led traders to price the risk of a spiraling war in the Middle East and marked an about face from early comments from the White House that suggested Trump would decide within two weeks on an attack to allow for negotiations. Traders will be on the look out for Iran’s response and the next move from Washington.

Market reaction had been generally muted since Israel’s initial assault this month. Even after falling for the past two weeks, the S&P 500 is only about 3% below its all-time high from February. The dollar has climbed just over 1% since hitting a three-year low earlier this month.

Investors have mostly expected the conflict to be localized, with no wider impact on the global economy, said Evgenia Molotova, a senior investment manager at Pictet Asset Management.

“It all depends on how the conflict develops and things seem to be changing by the hour,” she said. “The only way they take it seriously is if the Strait of Hormuz gets blocked because that will affect oil access.”

Iran has vowed to impose “everlasting consequences” for the bombing and said it reserves all options to defend its sovereignty. Meanwhile, Israel resumed its assaults, targeting military sites in Tehran and western Iran.

“This marks a turning point for markets,” said Charu Chanana, chief investment strategist at Saxo Markets in Singapore. The “question is whether US assets can still command a safe-haven premium.”

Still, downside may be limited because some market participants have been preparing for a worsening conflict. The MSCI All Country World Index has pulled back 1.5% since Israel attacked Iran on June 13. Fund managers have reduced their stock holdings, shares are no longer overbought and hedging demand has increased, meaning a deep selloff is less likely at these levels.

Elsewhere, Federal Reserve Bank of San Francisco President Mary Daly on Sunday said she sees the central bank’s monetary policy stance as “in a good place” currently, with risks to its US employment and price stability mandates as roughly equal. Daly said she sees the central bank cutting rates in the fall, later than Governor Christopher Waller who said Friday he sees a move as soon as July.

Traders will be parsing economic activity data in Europe and the US later Monday to gauge whether the US trade war has crimped factory output ahead of the July 9 reciprocal tariff deadline. European Central Bank President Christine Lagarde is also due to speak.

Global shares “remain at high risk of a sharp near term pull back as the risk of an oil supply disruption flowing from the war with Iran is high and Trump’s tariff threat is far from resolved,” said Shane Oliver, head of investment strategy and chief economist at AMP Ltd. in Sydney.