Risk-on back with a bang in ASX trade as world holds its breath about Iran, Israel’s next move

Iran’s rhetoric rather than action over US air strikes on its nuclear facilities and a slumping oil price have given investors all they needed to jump back into buying mode.

Markets staged a recovery on Tuesday as Iran’s retaliation against US attacks were considered underwhelming. Picture: Getty Images

Risk-on sentiment returned with a bang as Iran’s tepid retaliation to US strikes and a plunge in oil prices gave investors all they needed to jump back into buying mode.

Oil and gold languished in the red as equities surged, with financials leading the charge.

“Oil’s the key in all of this,” AMP chief investment officer Shane Oliver said.

“We’ve gone from West Texas Intermediate trading at $US68 a barrel before the strikes, up to $US76 and now back to $US66, so below the levels seen prior to the strikes. There’s been a complete reversal in oil prices and the market’s taking account of that,” he said.

Uncertainty has now been priced out of the market, Dr Oliver said as he attributed share price gains for Qantas and debutante Virgin Australia to the oil price retreat.

Qantas closed up 2.4 per cent at $10.32 while Virgin, which debuted back on the ASX on Tuesday five years after it collapsed into administration, climbed more than 11 per cent to close at $3.23.

The energy sector was the worst performer through the day following the 7 per cent plunge in oil prices. Woodside tumbled 6.5 per cent while Santos dropped a more palatable 1.5 per cent.

Overall, the S&P/ASX 200 and the All Ordinaries climbed 1 per cent through the session.

Ophir Asset Management’s Luke McMillan said the largely symbolic retaliation by Iran was the best-case scenario and a win for US President Donald Trump, as long as it lasted. His claims of a ceasefire between Israel and Iran helped to boost sentiment.

“The market has moved on; it’s risk-on now. We just have to wait to see if this is a true ceasefire and will bring a true end to the war,” Mr McMillan said, noting that a lot of the macro risks had been priced out of the market. But it wouldn’t take much to spike volatility and a risk-off mindset, he said.

“If you look at valuations in the US, they’re trading just a shade under 22 times forward PE,” he said.

“The US sharemarket has spent very little time at those levels historically … We’re pretty similar in terms of large caps in Australia.

“Commonwealth Bank is increasingly causing a lot of that, but it’s true more broadly for Australia’s market as well. Our price/earnings ratio is not as high as the US, but we also don’t have as many of those high-growth tech companies they have in the US. Right now our PE ratio is right up there with levels it very rarely gets to. And it doesn’t take much to rattle the cages.”

Commonwealth Bank hit a record in the day’s trade and climbed more than 2 per cent at the close to $188.13. Westpac surged 2.6 per cent to $34.29 while NAB gained 2.2 per cent to $39.75. Even ANZ rose 1.38 per cent to $28.60 despite UBS putting a sell rating on its stock this week and saying that its dividend was at risk.

“We’ve gone from being on a rollercoaster ride to a de-escalation overnight and volatility’s receding,” Australian Ethical deputy chief investment officer John Woods said.

“It’s a broad risk-on trade right now, and the banks should benefit from that. They are highly leveraged to the economy so when oil prices are rising there’s less consumer spend.”

Lower oil prices would bolster sentiment in financials, he said. “Long term, looking at valuations for Australian banks they do trade at a premium; there’s better value elsewhere,” Mr Woods said.

Middle East tensions eased marginally but market watchers were still alert to potential action by Iran.

Hours after Mr Trump claimed Israel and Iran had agreed to a phased implementation of a ceasefire over a 24-hour period, Iran’s Foreign Minister disputed the claims. In the same breath he confirmed Iran would halt its attacks if Israel stopped its strikes by 4am local time.

If the ceasefire holds, investor attention will soon turn back to tariffs and the July 9 deadline for countries to finalise trade deals with the US.

Dr Oliver said he expected that a number of countries would not meet that tariff deadline.

“So far the only agreement the US has made on these tariffs is the UK. And the messaging I’m seeing is that other countries may well face tariffs of more than 10 per cent,” he said.

Dr Oliver said he believed a 10 per cent tariff on Australian goods imported into the US would remain in place. “But it’s conceivable other countries could see tariffs jump up to 20 per cent,” he said.