US Stocks Fall Again as Middle East Hostilities Spread – Dow down 1.2%
US equities came under further pressure in trading yesterday as geopolitical tensions in the Middle East continued to escalate. The latest developments saw the Houthis launch attacks on Saudi energy facilities, while the US again targeted Iranian tankers, adding to concerns around the potential disruption to regional energy supplies as the Strait of Hormuz becomes more hostile on a daily basis. The renewed escalation kept risk sentiment subdued, with the Dow falling 1.18% to 52,786, while the S&P 500 declined 0.58% to 7,673 and the Nasdaq finished 0.32% lower at 26,421.
US Treasury yields moved higher as markets opened the new week, with the 2-year yield rising 2.8 basis points to 4.394%, while the benchmark 10-year yield edged 0.6 basis points higher to 4.788%.
The US dollar was broadly steady, with the USD Index slipping just 0.05% to 98.86. However, there was considerably more volatility within the FX market, with strong selling in USDJPY once again a major influence on broader dollar flows.
Oil prices were again the standout mover across commodity markets as the latest developments in the Middle East increased concerns over potential supply disruptions. Brent crude surged 2.41% to $99.34 a barrel, bringing prices within touching distance of the psychologically important $100 level, while WTI gained 1.55% to $93.03. With energy infrastructure increasingly being drawn into the conflict, the direction of oil prices is likely to remain closely linked to developments in the region.
Gold moved lower in contrast, falling 1.15% to $4,354.19 as higher US Treasury yields reduced some of the appeal of the non-yielding asset. The precious metal remains sensitive to movements in real yields and the US dollar, although ongoing geopolitical uncertainty continues to provide an underlying source of support.
Yen Remains Major Focus for FX Players
The continued strength in the Japanese yen remains an important theme for traders, particularly with markets increasingly focused on the potential for further policy tightening from the Bank of Japan and the risk of official intervention. The move in USDJPY in the last week has been extraordinary, to say the least, and various theories on the move have been bandied about the market, but what can’t be denied is the impact that it has had across the majors. Most of the other majors have been fairly rangebound in recent days, and given the increased hostilities in the Middle East, most traders would have expected to see the dollar gain ground on its haven status and increased US yields. However, the moves in USDJPY in particular have kept the dollar on the back foot, and now traders are looking at this pair for direction in the dollar. If we see the intense selling pressure start to pull back, we could see the dollar find its legs this week, especially if that coincides with stronger inflation data on Thursday and Friday.
Geopolitics to Again Dominate a Clear Event Calendar
Looking ahead, the macroeconomic calendar is particularly quiet today, with little in the way of major economic data scheduled to provide a significant market catalyst. As a result, geopolitical developments are likely to remain the primary focus for traders. Further escalation in the Middle East, particularly any developments involving energy infrastructure or shipping routes, could keep oil prices elevated and continue to influence sentiment across equities, FX and precious metals. In FX, all eyes will remain on Yen moves as the day progresses.
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