With investors trying to read the runes of this week's 'framework' trade agreement between the U.S. and China on Wednesday, worries surfaced about the state of play in the Middle East after the U.S. announced that it was moving personnel out of the region ahead of talks with Iran over the latter's nuclear-related activity.
Crude oil prices promptly jumped 4% and hit their highest in two months before giving up some of those gains earlier today. European travel stocks and auto makers fell more than 2% on Thursday on the jitters. Gold, however, was only marginally higher, and the dollar fell.
While no specific reason was given for the U.S. personnel orders, the U.N. nuclear watchdog passed a resolution on Thursday formally declaring Iran in breach of its non-proliferation obligations for the first time in almost 20 years.
Concern about Israeli threats to Iran's nuclear facilities inevitably ramped up.
The prospect of higher energy prices at a time of tariff-related inflation concerns will certainly rankle.
But so far at least, the Trump admnistration's import levies aren't putting much upward pressure on U.S. consumer prices, as May CPI came in below forecasts on Wednesday. Core annual producer price readings due out later today are expected to be steady.
Despite this week's crude gains, year-on-year oil prices are still down more than 10%. And two-year U.S. 'breakeven' inflation rates in the inflation-protected Treasury market fell to their lowest of the year at 2.44%.
Meanwhile, U.S. Treasury yields fell on a mix of soft inflation and robust demand at the 10-year auction on Wednesday. Some $22 billion of 30-year bonds are up for grabs later today, testing the recently shaky demand for long-duration debt.
Federal Reserve expectations haven't shifted greatly, with two quarter-point interest rate cuts still priced by yearend.
No move is expected before September, even though President Donald Trump once again called for an immediate full percentage point rate cut after the CPI report.
The dollar remains under pressure however, raising more concern about the absence of its traditional 'safe haven' role at a time of rising geopolitical tensions.
The dollar index fell to its lowest level since April, with the euro surging above $1.15 to within a whisker of its best levels since 2021.
Sterling was a standout loser against the euro, falling to its weakest against the single currency in a month after a surprisingly sharp drop in April UK GDP.
Stocks were slightly shaken by the whole picture, with the S&P500 ending in the red on the Middle East news on Wednesday and futures down almost half a percentage point ahead of Thursday's open. Chinese, Japanese and European bourses were all in the red on Thursday. Only South Korea's Kospi bucked the trend.
The wider trade war picture remained uncertain despite the U.S.-China progress, with details still patchy as the negotiated deal in London awaited final approval.
Trump on Wednesday said he was very happy with the trade deal, as it restored a fragile truce between the two biggest economies, claiming China agreed to free up rare earth supplies in exchange for the U.S. allowing Chinese students to attend U.S. colleges.
But he also insisted: "We are getting a total of 55% tariffs, China is getting 10%."
White House officials said the 55% represents the sum of a baseline 10% "reciprocal" tariff Trump has imposed on goods imported from nearly all U.S. trading partners, the 20% fentanyl-related tariffs, and pre-existing 25% levies on imports from China that were put in place during Trump's first term.
Commerce Secretary Howard Lutnick said the 55% rate on Chinese imports is fixed and unalterable. Treasury Secretary Scott Bessent said the deal would not reduce U.S. export restrictions on high-end artificial intelligence chips.
China on Thursday affirmed the trade deal, and a foreign ministry spokesperson said: "Now that a consensus has been reached, both sides should abide by it."
But with less than four weeks to go before the expiration of the 90-day pause on U.S. tariffs worldwide, markets remain concerned about what will happen next month.
Trump said on Wednesday he would be willing to extend a July 8 deadline for completing trade talks, but also said he did not believe that would be necessary, noting "At a certain point, we're just going to send letters out ... saying, 'This is the deal. You can take it, or you can leave it.'"
European Union talks, in particular, look unlikely to be concluded by then.
Elsewhere, Boeing shares fell 6% pre-market after news that an Air India plane headed to London with 242 people on board crashed minutes after taking off from India's western city of Ahmedabad.
Today's column looks at the weakening dollar and the debate about whether its decline is being driven by flight from U.S. assets at large or simply foreign investors hedging their dollar exposure.
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