Stocks Hit as Middle East Tensions Heat Up – Dow down 1.2%
Global markets adopted a more defensive tone overnight as escalating tensions in the Middle East weighed on investor sentiment. Fresh strikes from both sides of the conflict reinforced concerns that a negotiated peace agreement remains some way off, prompting a move away from risk assets and supporting traditional safe-haven flows into the US dollar.
US equity markets closed sharply lower, with the Dow Jones falling 1.21% to 50,687, while the S&P 500 declined 0.74% to 7,553 and the Nasdaq lost 0.89% to finish at 26,853. The declines reflected growing uncertainty surrounding the geopolitical outlook and concerns that prolonged disruptions in the region could have broader implications for inflation and global growth.
The move toward safety was evident in currency markets, with the US Dollar Index rising 0.31% to 99.53. Treasury yields also pushed higher, as the 2-year Treasury yield climbed 3.9 basis points to 4.082%, while the benchmark 10-year yield rose 5.1 basis points to 4.495%.
Brent crude oil advanced 1.92% to US$97.85 per barrel, while WTI crude gained 2.59% to US$96.20, as traders continued to price in the risk of an extended disruption to shipping through the Strait of Hormuz. Gold was unable to benefit from the geopolitical uncertainty, with the precious metal falling 1.18% to US$4,431.66 per ounce.
US Jobs Numbers Remain a Focus for Fundamentals
Once again, market moves have been dominated by updates from the conflict in the Middle East this week, while fundamental updates have been largely pushed to the back of investors’ minds. However, US jobs numbers have been coming out that could have a significant impact on longer-term views as we move into the second half of the year. Both the JOLTS Job Openings and the ADP Non-Farm Payrolls reports have exceeded expectations—although the ADP only marginally—and if we see this pattern continue in the coming days, with the key Non-Farm Payrolls data following suit on Friday, then we could see Fed rate expectations move even further in favour of a hike being the next move. In the short term, expect markets to keep trading in line with geopolitical updates. Stronger jobs data could reinforce recent inflation data and push yields and the dollar to fresh annual highs in the coming weeks and months.
Central Bank Updates Ahead, but Geopolitics Likely to Dominate
Looking ahead, attention turns to a relatively busy economic calendar, with some key central bank updates likely to be closely monitored. RBA Governor Michele Bullock is scheduled to speak during the Asian session, while ECB President Christine Lagarde and Bank of England Governor Andrew Bailey are both due to deliver remarks later in the day. In the New York session, attention moves back to data, where Weekly Unemployment Claims (exp. 214k) will provide another update on labour market conditions ahead of tomorrow’s key Non-Farm Payrolls release. Nevertheless, geopolitical developments in the Middle East are likely to remain the dominant driver of market sentiment and price action across asset classes.
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