TRADING DAY-Oil, yields, volatility soar

Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Oil and gas prices clocked their biggest rise in years, while bonds and most stock markets fell on Monday, after the U.S.-Israeli attack on Iran over the weekend triggered waves of volatility across world markets. The big - and surprising - exception was Wall Street. 

In my column today I look at the dilemma facing Treasuries investors - do they buy bonds on rising geopolitical instability and the hit to growth from surging oil prices, or sell on inflation fears? So far, inflation worries appear to be the driving force.

I'd love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* High energy. Very high

Supply disruption fears send oil and other energy prices soaring. Oil eases off earlier highs but still ends the trading day up 6%, pushing the year-on-year price change firmly into positive territory. This is a significant change for inflation models. 

The biggest rise was in liquefied natural gas, after Qatar said it has halted production. Benchmark European LNG rocketed more than 50% before trimming those gains to 40%, still the biggest one-day rise since Russia invaded Ukraine four years ago. 

* Let's be franc

Given the slump in world stocks, spike in market volatility and surge in geopolitical risk, one might have expected the Swiss franc to appreciate on Monday. After all, it is the world's safest 'safe haven' currency, right?

But the franc tumbled more than 1% against the dollar, its biggest fall since May, fueling speculation the SNB intervened to counter the flood of safe-haven buying. For its part, the SNB said in a statement it was prepared to do just that in order to prevent "excessive" appreciation of the franc. The signs are, it did.

* Resilience or complacency?

After Asian and European stocks fell 1-3% on Monday, Wall Street opened lower too. But it soon recovered, and ended the day narrowly mixed - the Dow dipped 0.15%, the S&P 500 added 0.04%, while the Nasdaq climbed 0.4% and the Russell 2000 small caps index jumped 0.9%.

Given the severity of events in the Middle East, and their impact on energy prices and bond yields, that's remarkable. It could even be argued that the 1-3% declines in Asia and Europe were muted moves. But closing higher? Let's see how the rest of the week pans out. 

U.S. Treasuries just clocked their best month in a year. But with war suddenly raging in the Middle East, investors must decide whether safe-haven demand will accelerate the bond market rally or if an inflationary surge in oil prices will send it screeching into reverse.

The dilemma for bond investors is this: buy Treasuries to hedge against a slump in risk assets amid spiking geopolitical risk, or sell in anticipation of the inflation - and possible Federal Reserve policy response - coming down the pike from soaring oil prices? 

In other words, which half of the "stagflation" dynamic will carry the day?

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