Trading Day: War fuels stagflation fears

ORLANDO, Florida, March 5 (Reuters) - Stocks sank on Thursday and another surge in oil prices sent bond yields shooting higher, as the spiraling conflict across the Middle East raised investor fears over energy supplies, higher inflation and slower growth.

More on that below. In my column today I offer a reminder that, amid the fog of war, economic fundamentals can’t be forgotten completely. Friday’s U.S. payrolls data, and any hint of AI’s impact on jobs, will avert eyes from the Middle East, at least temporarily.

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today. 1. Trump rejects Khamenei’s son as Iran war intensifieswith U.S.-Israel strikes 2. Dollar, bonds, or gold - which is the safest haven tohold? 3. Charting the widening impact of the Iran crisis onenergy markets 4. Private credit meets "show-me-the-money" moment 5. China’s parliament rolls out economic, politicalblue-print; here’s what you need to know

Today’s Key Market Moves * STOCKS: Solid rebound in Asia - Japan +2%, South Korea+10% - but Europe, Americas slide into the red. Nasdaq only down0.3%, Russell 2000 -2%; Brazil -2.5%, Mexico -3%. * SECTORS/SHARES: Eight S&P 500 sectors fall, three rise.Industrials, consumer staples, healthcare, materials -2% ormore. Caterpillar, Goldman Sachs -3.5%, IBM +2.5%. * FX: Dollar higher across the board, EM FX hit hardestwith ZAR and CLP down ~2%. AUD the biggest G10 decliner -1%. * BONDS: U.S. yields rise as much as 6 bps, curve steepensslightly. UK yields +10 bps, now +30 bps this week. 2-yearSchatz yield +25 bps this week, most in three years. * COMMODITIES/METALS: Oil jumps to highest since July2024. Brent +5%, WTI +9%; now up 17-20% on the week, the mostsince February 2022. Gold -1.5% on firm dollar, yields.

Today’s Talking Points

* Learning the "transitory" lesson

As energy prices soar, markets are betting that central bankers won’t repeat the 2021-2022 playbook of looking through supply shocks and a subsequent surge in "transitory" inflation. They’ve learned that lesson, right?

That appears to be traders’ bet - only one Fed rate cut this year is baked in now, and that’s not until October; another BoE cut isn’t fully priced at all; the ECB is more likely to hike than cut; and the RBA could even hike again this month.

* No room for complacency

There was a glimmer of hope on Wednesday that back-channel U.S.-Iran diplomacy might pave the way for peace to break out in the Middle East. Traders seized upon it, bought back beaten-down stocks, and Europe and Wall Street rallied.

Predictions are dangerous at the best of times, but that looks like a false dawn. The war is spreading, messy, and getting more entrenched. Energy prices and bond yields are spiking, and risk assets are feeling the heat. Yet the Nasdaq is flat on the week. Justified calm, or complacency?

* A job lot

With investors’ focus firmly on the market implications of events in the Middle East, economic fundamentals are understandably taking a back seat. They should be a driving force, however, at 8:30 a.m. Eastern Time on Friday, when the U.S. Bureau of Labor Statistics releases the February jobs data.

A strong report will let Fed officials breathe more easily, while signs of cracks in the labor market will be tricky to navigate - yields are spiking on the energy supply shock, yet the curve is the flattest this year. Stagflation on the horizon?

What could move markets tomorrow? * Developments in the Middle East * Reserve Bank of Australia Deputy Governor Andrew Hauserspeaks * South Korea inflation (February) * European Central Bank officials scheduled to speak includePresident Christine Lagarde, board members Isabel Schnabel andPiero Cipollone, and Pierre Wunsch * Euro zone GDP (Q4, revised) * Germany industrial production (January) * Canada PMIs (February) * U.S. non-farm payrolls (February) * U.S. retail sales (January) * U.S. Federal Reserve officials scheduled to speak includeGovernor Stephen Miran, San Francisco Fed President Mary Daly,Philadelphia Fed President Anna Paulson, Boston Fed PresidentSusan Collins, and Cleveland Fed President Beth Hammack

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