US Stocks Extend Losses as Middle East Conflict Escalates
US equity markets declined further in trading yesterday as the conflict in the Middle East intensified, with both the US and Iran increasing military strikes across the Gulf. The escalation added to concerns over regional energy supplies and weighed heavily on investor sentiment, particularly as Brent crude moved above the key $100-a-barrel level.
All three major US indices finished the session lower. The Dow Jones declined 0.77% to close at 52,380, while the S&P 500 fell 0.48% to 7,636. The Nasdaq also came under pressure, dropping 0.64% to finish the session at 26,253.
US Treasury yields moved higher across the curve as investors continued to assess the inflationary implications of rising energy prices. The 2-year Treasury yield increased 3.6 basis points to 4.430%, while the benchmark 10-year yield rose 5.2 basis points to 4.841%, reaching its highest level since 2023. The move came despite news that the US Treasury is expected to purchase up to $6 billion of longer-dated bonds today.
The US dollar was relatively steady against the major currencies, with the Dollar Index finishing around the 98.77 level.
Energy markets remained at the centre of the broader market move as the escalation in the Gulf increased concerns over potential disruptions to global oil supplies. Brent crude gained 3.83% to close at $101.67 a barrel, breaking through the psychologically important $100 level. WTI crude also rallied strongly, rising 3.25% during the session.
Gold also benefited from the increased geopolitical uncertainty, gaining 1.06% to close at $4,400.49. The move came despite higher US Treasury yields, with safe-haven demand providing support as investors responded to the latest deterioration in the Middle East.
PPI Data Today in Sharp Focus for Traders
Today’s US Producer Price Index release has the potential to generate a sharp market reaction, particularly with Federal Reserve rate expectations finely balanced ahead of next week’s FOMC meeting. Markets are currently assigning roughly a 60% probability to a 25bp hike, making the upcoming inflation numbers particularly important.
July’s PPI numbers were notably softer, which helped to reinforce the more dovish side of the Fed debate, with Governor Christopher Waller subsequently indicating he could support keeping rates unchanged if inflation continued to cool.
Today, consensus expectations are for headline PPI to rebound by around 0.4% month-on-month, while core PPI is expected to rise 0.3% – higher prints than we saw last month.
With the Fed decision approaching and markets divided between a hold and another hike, the potential for volatility is elevated. A materially stronger-than-expected print could quickly increase hike expectations. Conversely, another downside surprise could reinforce the case for a Fed hold, potentially hitting the dollar and yields. With the arguably more influential CPI still to come tomorrow, traders should be prepared for a potentially volatile couple of sessions into the end of the trading week.
Fundamental Calendar Picks Up for Traders Today
Attention now turns to a considerably busier fundamental calendar than we’ve seen in the previous few days. There is nothing of note on the cards in the Asian session, but there is a busy few hours on the London/New York crossover. The European Central Bank will announce its latest interest rate decision midway through the London day, with the bank firmly expected to raise rates by 25 basis points. Then the US market kicks in with PPI inflation data (exp. +0.4% m/m, Core +0.3% m/m) and Weekly Unemployment Claims (exp. 205k) before attention jumps back across the Atlantic for the ECB Press Conference. The US Treasury’s 30-year bond auction will draw extra attention later in the day after yesterday’s update that the Treasury department will be buying triple what they had previously advised.
While these events have the potential to generate significant moves across currencies, bonds and equities, geopolitical developments are likely to remain the dominant influence on overall market sentiment. With Brent now above $100 a barrel and hostilities in the Gulf continuing to intensify, further developments in the Middle East could quickly overshadow the scheduled economic releases and drive another volatile session across global markets.
Explore all upcoming market events in the Economic Calendar.
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