Companies that rushed into Iran brace for exit
Move may lead to ‘gradually and modestly reduced oil production’, pushing up oil prices
The dollar touched a new high for the year and world stocks held steady yesterday after President Donald Trump pulled the United States out of an international nuclear deal with Iran.
Gold prices retreated and bond yields rose. The US 10year Treasury once again breached the psychologically significant 3-per cent level and hit a two-week high of 3.0140 per cent, supported by expectations of higher interest rates.
“There is still an interim period before sanctions kick in. And other signatories and Iran want to keep the deal going so there is a period where things could be hammered out,” ING rates strategist Benjamin Schroeder said. “But I would have expected a bit of a safe-haven bid this morning,” he noted, referring to bonds.
The MSCI world equity index, which tracks shares in 47 countries, was flat and continued to trade in a narrow range. The pan-European STOXX 600 meanwhile rose 0.2 per cent.
The rise in Treasury yields helped fuel the dollar’s rally, with the greenback hitting a new 2018 high before giving up gains.
The dollar index against a basket of major currencies was at 93.026. It has risen about 1 per cent this year.
The euro recovered slightly after hitting a new four-and-a-half-month low of $1.1821 and last stood at $1.1880, having fallen about 4 per cent in the past three weeks.
President Donald Trump’s decision to pull out of the Iran nuclear accord and impose sanctions on that nation also risks fallout for the US economy.
The US move may lead to “gradually and modestly reduced oil production” by Iran, the world’s fifth-largest producer, that would further push up global oil prices, according to a research note Tuesday by Gregory Daco, chief US economist at Oxford Economics.
If West Texas Intermediate (WTI) crude oil prices average $70 (Dh257.11 billion) a barrel this year, that would amount to a drag on growth worth half of the 0.7 percentage-point boost from tax cuts and a governmentspending increase, Daco wrote.
With gasoline prices already squeezing consumers, the possibility of extended pain casts a shadow on widespread expectations that US household spending is poised for a rebound in coming months driven by tax cuts. At the same time, energyproducing businesses and regions within the US would benefit from higher oil prices.
The price of WTI crude topped $70 a barrel on Monday for the first time since 2014, amid upward pressures from weaker supply, stronger demand and geopolitical uncertainty surrounding the Iran sanctions.
Other economists also estimate fuel bills could erode the boost to paycheques from lower taxes. Rising prices for gasoline act like a tax hike on consumers, and if the current price is sustained, “as much as one-third of the benefit from lower withholding this year could be wiped out,” Morgan Stanley analysts wrote in a note on Tuesday.