Risk appetite is higher on optimism that the worst is over in the Iran conflict, while the reality is that nothing much has changed on the battleground. Brent crude falls to just over US$100/bbl. IEA says more emergency oil stocks available if required

Risk appetite is higher on optimism that the worst is over regarding the Iran conflict, while the reality is that nothing much has really changed on the battleground.  Brent crude is lower at just over USD100 per barrel.  US and European equity markets have gained, and global rates are modestly lower.  Against a backdrop of a broadly weaker USD the NZD and AUD have outperformed.

Oil opened trading for the new week on a high note, following the weekend strikes by the US of military targets on Iran’s Kharg Island, an oil-export hub, which represented an escalation of the conflict.  Brent crude opened around USD106.50, before falling back.  It currently trades just over USD100, down over 2% from last week’s close.

The IEA said it has more emergency oil stocks available after the current release of 400mn barrels reduces reserves by only 20%. The head of the IEA said, “while our stocks release can provide a buffer for now, it is not a lasting solution”, adding that the single most important step would be a reopening of the Strait of Hormuz. 

President Trump’s call for other countries to help reopen the Strait of Hormuz has been met with caution or outright rejection, with many countries not wanting to be drawn into the conflict.

Despite more optimism in markets overnight, the reality is that the conflict continues unabated, with Iran striking a key UAE oil-export hub and Saudi Arabi and Kuwait intercepting a number of drones targeted at them.  Iraq reported that one of its major Southern oil fields was targeted.  Israel has been targeting infrastructure in Tehran.  The Strait of Hormuz remains effectively closed, although Iranian ships are still crossing the passage and a Pakistan-flagged vessel got through.

Sources suggest that oil production cuts by UAE and Kuwait have increased to a combined 2.8mn barrels per day.  Saudi Arabia’s oil production has been cut by 2-2.5mn barrels per day and Iraq is down 2.9mn.

Bloomberg notes that shipping fuel oil in Singapore, the world’s most important refuelling shipping port, is in short supply and its cost has already surpassed the peaks of 2008 and 2022.  As well as the higher cost, there is a good chance that ports in Singapore will run dry of the fuel, with a negative cascading effect on all shipping from the region.

The oil and gas price shock is no longer confined to energy markets.  It is propagating through manufacturing supply chains, transportation, food systems, and consumer goods, with particularly acute effects in Asia but increasingly with global reach.

All that said, the market is still treating the global shock as a minor hiccup than a long-lasting disruption.  US equities are stronger, with the S&P500 up 1% in early afternoon trading, albeit fading a gain that saw it up as much as 1.4% earlier in the session.  The Euro Stoxx 600 index closed up 0.4%.

Global rates are lower across the board.  US Treasury yields are down 4-5bps across the curve from last week’s close after pushing a little higher through the Asian trading session.  After peaking at 4.27% overnight, the 10-year rate is currently 4.23%, down a couple of basis points from the NZ close.

Optimism about the conflict is also evident in the currency market, with a broadly weaker USD.  The NZD has outperformed, bouncing back from the hit is has taken over the past two weeks.  It is 1.3% stronger from last week’s close at around 0.5850.  The AUD is also more than 1% stronger at 0.7060, and NZD/AUD is slightly higher at 0.8285.  NZD crosses are all stronger, with the largest gains against the CAD and JPY.

In economic data, Canadian CPI data were slightly softer than expected in February, while US industrial production continues to show gains consistent with a recovery in the sector.

China economic activity data for the first two months of the year were stronger than expected across the various indicators.  This was an encouraging start to 2026 after a weak end to last year, although it remains to be seen what the impact of the Iran conflict will be.

In the domestic rates market there was further underperformance, with a one-sided swaps market resulting in higher rates across the curve, with offshore investors bailing out of their received positions.  The 2-year rate closed up 6bps to 3.39%, its highest level in nearly a year, while the 10-year rate closed up 8bps to 4.38%, its highest level since mid-2024.  NZGBs followed for the ride, with the 10-year rate up 7bps to 4.73%.

On the calendar today, NZ monthly CPI indicators for February are released.  There is less interest than usual, as the data pre-dates the Iran conflict and we are in the early stages of inflation shooting a lot higher.  The RBA is widely expected to increase its cash rate for a second consecutive meeting, taking its cash rate to 4.1%, but with the market pricing only about a 65% chance of this, there is some lingering uncertainty about whether it follows through.

Jason Wong is the senior Markets Strategist at BNZ Markets.