Despite reports on Monday that Iran was pushing for a ceasefire, the two sides continued to bombard each other overnight. U.S. President Donald Trump left the G7 summit in Canada early to focus on the crisis, issuing an alarming evacuation warning to the residents of Tehran in the process.
While U.S. crude prices edged back up above $72 per barrel again on Tuesday, they remain below Friday's close and almost 8% lower than they were this time last year.
For now at least, neither Iran's major oil export installations nor the critical regional waterway of the Straits of Hormuz have been closed off.
The firmer oil price was enough to knock back global stock markets again after Monday's relief rally, with U.S. index futures giving up about half of yesterday's jump. Gold slipped back to Thursday's levels, while the safe-haven Swiss franc firmed again ahead of the Swiss National Bank's expected easing on Thursday.
Moves in U.S. Treasuries and the dollar were minimal ahead of the Federal Reserve's two-day meeting starting later today.
Meanwhile, the Bank of Japan left its key rates unchanged as expected earlier on Tuesday. Japan's yen weakened a touch on the BOJ decision, which also included a plan to decelerate the pace of its balance sheet drawdown next year, meaning the central bank will be buying more bonds next year than they would have under the prior plan.
"There is bigger downside risk for both Japan's economy and prices," BOJ Governor Kazuo Ueda said at a press briefing after the meeting.
The Fed is also unlikely to shift policy this week given the fog surrounding both the trade war and now oil price uncertainties around the Middle East war. Policymakers will, however, update their quarterly economic and rate projections and offer some guidance as to how they see the situation panning out.
On trade, Trump said on Tuesday that he still planned to send out letters to negotiating countries on the final U.S. demands before the 90-day reprieve on the 'reciprocal' tariffs expires early next month. He also noted that pharma tariffs are coming.
The European Union was not yet offering a 'fair deal', he said, though he added that there was a chance of a deal in the 'tough' talks with Japan. There was better news for Britain as Trump signed an agreement on Monday formally lowering some tariffs on imports from the UK while the countries work toward a formal trade deal.
U.S. Senate Republicans, meantime, unveiled proposed changes to Trump's sweeping tax cut and spending bill that would make some business-related tax breaks permanent while limiting the deduction for state and local income taxes.
Uncertainty about mounting debt piles and the long-term course of inflation have caused investors around the world to back away from super long-term government bonds where the price sensitivity to shifts in thinking is greatest.
That move away from long-duration isn't helped by persistent political pressure on the Fed this year to immediately slash rates.
Today's column looks at the risk that White House demands for lower borrowing costs could force the Fed to act tougher than it might have otherwise.
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