By Lawrence White
LONDON (Reuters) -Most stocks held firm on Wednesday, while oil prices and some safe haven assets rose, suggesting that the market impact of escalating Middle East tensions has been contained for now.
Europe’s benchmark STOXX index rose 0.24% and MSCI’s broadest index of Asia-Pacific shares climbed 1.23%, despite fears of a wider conflict following Iran’s ballistic missile strike on Israel.
The safe-haven dollar traded close to its strongest in three weeks versus the euro.
Macroeconomics also buoyed the dollar, with a resilient U.S. job market arguing for a smaller Federal Reserve interest-rate cut in November, and euro zone inflation trends backing a European Central Bank easing this month.
U.S. S&P 500 stock index futures weakened 0.19%, after the cash index lost 0.9% overnight.
Mainland Chinese markets were shut for the Golden Week holiday.
“In the chain of potential market volatility shocks, geopolitics will typically trump economics, corporate earnings, or a central bank response – largely because most market players are poor at pricing risk around these events,” said Chris Weston, head of research at Pepperstone.
“While these events typically reconcile in a market-positive fashion, the tail risk it can throw up is clearly significant,” Weston said. “The situation remains fluid, and the slightest calming or increased aggression in the rhetoric from Israel or Iran could result in a sizeable impact on sentiment in markets.”
Iran said early on Wednesday that its missile attack on Israel was finished barring further provocation, although Israel and the U.S. promised retaliation.
Brent crude futures gained 1.9% to $74.99 per barrel, extending a 2.5% advance from Tuesday. U.S. WTI futures climbed 2.2% to $71.4 per barrel, after Tuesday’s 2.4% rally.
“Speculation of an Israeli strike on Iranian oil fields seems unlikely, as such a move would likely drive oil prices toward $80, displeasing Israel’s allies, who are making strides against inflation,” said Tony Sycamore, an analyst at IG.
“Instead, strategic Israeli strikes on critical weapons factories and military objectives are more probable,” he said.
In such a situation, “there is hope for a return to the more contained shadow conflict that has persisted between Israel and Iran’s regional proxies” for most of the past year, Sycamore said.
FALLOUT CONTAINED
Elsewhere asset prices moved tentatively, suggesting longer-term macroeconomic concerns were for now outweighing any impulsive investor reactions to Middle East events.
Gold eased 0.3% to $2,654.27 per ounce, following a more than 1% jump in the previous session that brought it close to last month’s record high at $2,685.42, as a flight to the safe-haven dollar constrained the precious metal’s gains.
Benchmark 10-year Treasury yields ticked up about 4 basis points (bp) to 3.7467%.
The dollar index, which tracks the U.S. currency versus the euro and five other major rivals, was steady at 101.25 after pushing as high as 101.39 on Tuesday for the first time since Sept. 19.
Europe’s shared currency was little changed at $1.1061 following a 0.6% drop in the previous session, when it dipped to $1.1046 for the first time since Sept. 12.
Euro area data on Tuesday showed inflation fell below the ECB’s 2% target last month, bolstering bets for a quarter-point rate cut on Oct. 17.
Meanwhile, U.S. figures overnight showed a solid economy, a day after Fed Chair Jerome Powell pushed back against the likelihood of another 50 basis point rate cut when the U.S. central bank meets next month.
Job openings unexpectedly increased in August after two straight monthly decreases, but hiring was soft and consistent with a slowing labour market.
Private payrolls data is due later on Wednesday, ahead of potentially crucial monthly non-farm payrolls numbers on Friday.
A crippling U.S. dock strike, that could cost the economy $5 billion each day, will also be at the front of investor minds, with hopes for a quick end dashed by a lack of active negotiation overnight.
(Reporting by Lawrence White in London and Kevin Buckland in Tokyo; Editing by Jacqueline Wong, Sonali Paul and Jane Merriman)
