LONDON/SINGAPORE: European stocks on Wednesday shrugged off renewed hostilities between Iran and the United States, as oil prices edged up, with investors also focused on upcoming U.S. inflation data that could influence the rates outlook.
The pan-European STOXX 600 index rose 0.1%, with gains across most sectors.
That was in contrast to a loss of 2.3% for MSCI’s broadest index of Asia-Pacific shares outside Japan, where the tech-heavy South Korean KOSPI lost 4.5% as AI stocks came under pressure.
Iran’s Revolutionary Guards said they had carried out missile and drone attacks on U.S. military bases in Jordan, Kuwait and Bahrain in retaliation for American strikes on Iranian targets around the Strait of Hormuz. The clashes marked one of the biggest outbreaks of hostilities since the two countries agreed to a ceasefire in April.
“It’s an ongoing risk, although to a lesser extent,” said Fleura Shiyanova, fundamental analyst at Kepler Unigestion in Switzerland, of the Iran war. “The risks are much more understood than they were at the beginning, but now the question is how long it will last.”
Investors were also positioning themselves ahead of U.S. inflation data and other major upcoming events such as the SpaceX IPO, Shiyanova said.
Europe’s relative lack of a tech hardware sector has meant it has taken a back seat in the AI-driven rally that has lifted U.S. and Asian stocks, but it has also insulated the region against sharp selloffs in tech stocks.
Oil prices reacted relatively mildly to the strikes, edging up from seven-week lows touched in the previous session. Brent futures rose 0.2% to $91.66 a barrel, while U.S. West Texas Intermediate WTI crude climbed 0.3% to $88.46.
On Tuesday, U.S. stocks fell as a rebound for tech shares fizzled, with worries over sky-high AI valuations, Middle East tensions and rising rate hike bets dampening appetite for risk. The CBOE volatility index .VIX, sometimes referred to as Wall Street’s fear gauge, touched its highest intraday level since April 7.
Wall Street futures were down between 0.3% and 0.5%.
INFLATION TEST AWAITS
Investors will be looking at U.S. inflation data later on Wednesday to gauge the impact of the war. A Reuters survey of economists predicts inflation likely increased to 4.2% in the 12 months through May in what would be the largest annual rise since April 2023.
A stronger-than-expected jobs report on Friday increased bets that the Federal Reserve will hike interest rates this year. Traders have now fully priced in a 25 basis point hike in December versus expectations of two rate cuts before the war.
“If CPI today is hot, it will be much harder for the Fed to sound relaxed next week,” said Charu Chanana, chief investment strategist at Saxo in Singapore. “The Fed probably cannot hike aggressively into a pure supply shock, but it also cannot ignore inflation expectations if oil keeps rising.”
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, edged 0.1% lower to 99.87.
The European Central Bank’s two-day meeting on monetary policy was also due to start on Wednesday. The ECB is widely expected to raise interest rates by 25 basis points to combat rising energy costs, though the bigger focus will be on policymakers’ remarks on the outlook for monetary policy.
The euro was at $1.155 while sterling was steady at $1.338.
In Japan, the yen changed hands at 160.36 per dollar, staying near the 160-level widely seen as a line in the sand for potential official intervention.
Japan’s wholesale inflation accelerated in May at the fastest pace in three years as price pressures from the war broadened, data showed on Wednesday, adding to the case for further interest rate hikes by the Bank of Japan.
