US Indices Fall as War in the Middle East Rolls on – Dow down 1.6%
US equity markets moved lower overnight as the conflict in the Middle East entered its sixth day. All three major US indices closed the session in negative territory. The Dow Jones declined 1.61% to finish at 47,954, while the S&P 500 fell 0.56% to 6,830. The Nasdaq proved comparatively resilient, easing 0.26% to close at 22,748. The US dollar continued to strengthen, with the DXY rising 0.29% to 99.08 as investors sought relative safety in the greenback. US Treasury yields also extended their recent move higher, recording a fourth consecutive daily gain. The 2-year Treasury yield increased by 3.2 basis points to 3.579%, while the 10-year yield rose 4.0 basis points to 4.136%. Energy markets remained a key focus for traders, with oil prices advancing sharply amid ongoing concerns about potential supply disruptions. Brent crude rose 3.02% to settle at $83.89 per barrel, while WTI crude gained 5.76% to close at $78.96. In contrast, gold declined despite the elevated geopolitical backdrop, with the stronger US dollar weighing on the precious metal. Gold fell 1.20% to $5,077.03.
Markets Preparing for Longer Conflict and Higher Inflation
Global financial markets are starting to price in greater risk of inflation as concerns increase that the situation in the Middle East may prove more prolonged than initially anticipated. Investor sentiment remains cautious as markets assess the potential economic implications of higher energy prices and ongoing geopolitical uncertainty. US Treasury yields are reflecting persistent inflation concerns and expectations that elevated energy prices may complicate the Federal Reserve’s policy outlook. The next Fed rate announcement is just 12 days away, and the market is not expecting any move. However, it is further down the curve that the war has had a greater impact. The market was looking strongly at another 25-basis-point rate cut in either June or July, but pricing has now drastically increased that the rate will remain on hold, with odds moving up from just 16% to 48% that the rate will still be in the 350–375 level after the July meeting. Investors now fear that those odds will continue to increase if the conflict starts to roll out into weeks rather than days.
Non-Farms and Middle East in Focus to Close out the Week
Looking ahead, geopolitical developments will remain firmly in focus for markets. There is little of note on the event calendar in the first two sessions of the day; however, attention will turn to key US economic data scheduled for release later today, particularly the latest Non-Farm Payrolls report. Any significant deviation from market expectations could generate further volatility in already active trading conditions. The market is expecting the headline NFP number to show a 58k increase in jobs last month, with Average Hourly Earnings up 0.3% and the Unemployment Rate remaining steady at 4.3%. US Retail Sales data is also due to drop at the same time, with the market expecting the month-on-month number to show a 0.3% decrease, with the Core data coming in with a 0.1% increase. We also hear from several Fed members later in the day, including Daly, Paulson, Collins, and Hammack, which could give some further hints on Fed rate expectations.
