US Stocks Fall as Middle East Heats Up – Dow down 0.5%
US stocks moved lower in trading yesterday as renewed concerns around the Middle East weighed on risk appetite. President Trump indicated that he would not look to extend the ceasefire, while Iran threatened to resume offensive action around the Strait of Hormuz, raising fears that tensions across the region could escalate further. The Dow Jones fell 0.51% to close at 53,459, while the S&P 500 declined 0.52% to 7,745. The technology-heavy Nasdaq outperformed slightly but still finished 0.32% lower at 26,644.
US Treasury yields pushed higher as traders assessed the potential inflationary impact of further disruption in the Gulf. The 2-year Treasury yield rose 0.6 basis points to 4.175%, while the benchmark 10-year yield climbed 3.0 basis points to 4.722%. The US Dollar, however, moved lower against the major currencies, with the US Dollar Index falling 0.09% to 99.58 as traders continued to balance geopolitical safe-haven demand against the broader interest-rate outlook.
Oil prices pushed sharply higher as the rhetoric between the US and Iran intensified and concerns increased that the Strait of Hormuz could remain disrupted. Brent crude gained 2.90% to close at US$91.09 a barrel, while WTI rose 2.55% to US$84.50. With oil now back above US$90 a barrel, traders will be watching closely for any further escalation, with another sustained move higher likely to add to global inflation concerns.
Gold also benefited from the increase in geopolitical uncertainty, gaining 0.90% to close at US$4,415.19 an ounce. The precious metal has once again moved back towards recent highs as traders look for protection from the increased uncertainty, with further developments in the Middle East likely to remain an important driver of price action.
Middle East Poised for More Hostilities
The risk of renewed conflict in the Middle East is once again moving firmly into focus for financial markets, with hopes of a permanent peace agreement between the US and Iran appearing to have stalled. A senior Iranian official has warned that Tehran could shift to a “fully offensive” military posture, while Washington has ruled out extending the current temporary ceasefire, raising the prospect of hostilities escalating once again.
Iran has warned that it is prepared to take military action to break the US naval blockade if diplomatic efforts fail, while negotiations with Oman over a separate agreement to manage shipping through the Strait of Hormuz have also come under increasing pressure. Tensions were heightened further after President Trump issued a strong warning towards Oman over its involvement in the negotiations.
A return to full-scale conflict, particularly if the Strait of Hormuz remains closed to normal shipping, could provide the catalyst for both Brent crude and WTI to challenge their annual highs near $120 a barrel once again. The coming days could therefore prove critical for oil markets and the broader global financial outlook.
Geopolitics to Dominate Markets Again Today
Geopolitical developments are again expected to dominate market sentiment today, with the situation around the Strait of Hormuz remaining firmly in focus. The economic calendar is relatively quiet, with little on the cards in the Asian or New York sessions, although UK employment data during the European session will provide some additional direction. Traders will be watching the Claimant Count Change (exp 16.5k), Unemployment Rate (exp 4.8%) and Average Earnings Index (exp 4.0% 3m/y) figures for any signs of changing conditions in the UK labour market and are expecting to see moves in the pound around the release.
The combination of elevated oil prices, higher Treasury yields and renewed geopolitical risk is likely to keep markets volatile, with traders remaining particularly sensitive to any further updates from the Middle East.
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