Oil jumps and rand comes under fresh pressure as Iran conflict flares again

Global markets moved into a risk-off mood over the weekend after the United States struck Iranian rocket launchers near the Strait of Hormuz on Sunday, reigniting a Middle East conflict that had shown weeks of relative calm and sending oil prices sharply higher as trade resumed on Monday.

The weekend escalation

US Central Command said its forces had struck and disabled Iranian rocket launchers that were preparing to lay mines in the critical corridor for global oil shipments. The strike followed weeks of comparative quiet in the region and immediately unsettled energy markets: Brent crude for November delivery rose above $90 a barrel in early Monday trade, while West Texas Intermediate climbed towards $86, extending losses in risk assets that began on Friday.

A rough end to last week on Wall Street

The renewed Middle East tension compounds a difficult finish to last week for global equities, after Federal Reserve chair Kevin Warsh delivered his first major policy address as chair at the Kansas City Fed's Jackson Hole symposium on Friday. Warsh said inflation had yet to slow meaningfully and that the central bank needed clearer evidence of easing price pressures, comments read by markets as hawkish. The S&P 500 fell 0.25% to close at 7,711.48, the Nasdaq Composite dropped 0.52% to 26,402.42 on renewed weakness in chip stocks, and the Dow Jones Industrial Average slipped a more modest 0.02% to 53,559.34. Odds of a US interest rate increase in September jumped from around 35-57% following Warsh’s speech, according to CME FedWatch data, and the 10-year Treasury yield rose four basis points to 4.72%.

Bond markets under strain

The double blow of a hawkish Fed and a fresh geopolitical shock pushed short-term government borrowing costs to multi-year highs across several markets on Monday. Japan's two-year government bond yield touched a 31-year high, while yields on short-dated German, French, British, Spanish, Portuguese, Polish and Swiss debt all climbed as investors priced in a longer period of elevated rates.

Currencies and the rand

The dollar held onto Friday's gains – its biggest one-day advance in about a month – as the prospect of a September rate hike and the flight to safety from the Iran news supported the currency. Most emerging-market currencies weakened against the dollar as a result, a pattern the rand has followed repeatedly through the various flare-ups in the Iran conflict this year, given South Africa's exposure to oil-price swings as a net energy importer. The rand had already slipped to around R16.15 to the dollar on Friday – its weakest in more than a week – from a multi-month high of R15.90 touched on 25 August, and was trading at roughly R16.16 early on Monday.

Asian and European trade

Asia-Pacific markets closed mixed on Monday: Japan's Nikkei 225 slipped 0.14%, South Korea's Kospi reversed early losses to close 0.46% higher, mainland China's CSI 300 gained 0.35%, Hong Kong's Hang Seng ended flat, and Australia's S&P/ASX 200 fell 0.18% to 9,076. In Europe, the pan-European Stoxx 600 traded close to flat, with energy shares among the gainers on the back of higher oil prices; UK markets were closed for a public holiday.

Local outlook

With the JSE's All Share Index having spent recent sessions not far off record territory – it remains up around 13% over the past 12 months, within a 52-week range of roughly 100,433 to 129,339 points – the twin pressures of a firmer dollar and a fresh oil-price spike are likely to be the main themes for local trade this week, particularly for rand hedges, resource counters and any Sasol-linked names sensitive to the crude price.

SOURCES: Bloomberg, CNBC, TheStreet, Trading Economics, and Xe.