US Markets Fall as War Escalates – Nasdaq Off 1.4%
US stock markets closed lower on Friday, capping off a difficult week for global equities as investors continued to scale back exposure to risk assets amid escalating tensions in the Middle East and ongoing weakness in the technology sector. The Dow Jones fell 0.77% to 52,146, while the S&P 500 lost 1.01% to finish at 7,457. The technology-heavy Nasdaq again bore the brunt of the selling, declining 1.40% to close at 25,520.
US Treasury markets were mixed to end the week, reflecting the competing influences of geopolitical uncertainty and expectations for monetary policy. The 2-year Treasury yield rose 3.6 basis points to 4.177%, while the 10-year yield eased 0.6 basis points to 4.547%. The US Dollar Index was little changed, slipping just 0.01% to 100.76 as currency markets adopted a cautious tone ahead of another potentially volatile week.
Energy markets were the standout performers as geopolitical tensions intensified. Brent crude surged 4.59% to US$88.10 a barrel, while WTI crude climbed 4.48% to US$82.49 after further military strikes between the United States and Iran heightened concerns over the security of oil supplies through the Gulf. Markets are also preparing for another volatile open after reports over the weekend confirmed that two US military personnel were killed, further increasing fears that the conflict could escalate.
Gold had a better day, bouncing off levels close to the annual low, rising 1.18% to US$4,016.69 an ounce. Despite Friday’s recovery, the metal still finished the week lower as traders continued to weigh the outlook for interest rates against growing geopolitical risks.
Oil Moves to Drive Markets in the Week Ahead
The huge escalation in the conflict in the Middle East that we have seen over the past week looks set to dominate market sentiment in the coming days, with the key driver likely to be oil again. Both of the major oil benchmarks have gained well over 20% from their lows at the start of the month, and we have already seen gapping on the open today after two US personnel were confirmed killed by strikes in the Gulf over the weekend. Markets had initially been fairly resilient at the start of last week to the increasing ‘sabre rattling’ between the US and Iran, but the conflict now seems to be escalating on a daily basis, and the oil price with it. If we continue to see this pattern in the coming days, then expect to see higher inflationary concerns across the globe, lower stocks, higher yields, and a higher dollar. Oil prices saw the most volatility over the past few months, and they are likely to remain the leader for markets as we progress through the week, with traders expected to be glued to oil updates throughout the trading sessions.
Quiet Calendar Day to Start the Week Again
Looking ahead, investors are likely to remain focused on developments in the Middle East, with geopolitical headlines expected to continue driving market sentiment. On the economic event front, it is a relatively quiet day to kick off the week. The Asian session will see reduced liquidity, with Japanese markets closed, and whilst the market will pay close attention to the Chinese Loan Prime Rate releases midway through the day, the 1-year and 5-year rates are likely to remain at 3% and 3.5%, respectively, and traders anticipate little impact on the market. There is nothing of note scheduled in the London session; however, attention will later turn to Canadian CPI data (exp. -0.2% m/m, +2.1% y/y) close to the New York open, which may see some moves in the loonie, although any significant escalation in the Gulf is likely to overshadow scheduled economic data and keep volatility elevated across financial markets.
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