US Stocks Pull Back as Middle East Tensions Persist – Nasdaq off 0.6%
US equity markets pulled back overnight as investors continued to assess developments across the Middle East, with hostilities ongoing in both the Persian Gulf and the Red Sea despite continued efforts towards peace talks. The Dow Jones fell 0.34% to close at 53,791, while the S&P 500 declined 0.32% to 7,728. The technology-heavy Nasdaq underperformed, falling 0.60% to 26,445 as geopolitical uncertainty continued to weigh on risk appetite.
US Treasury yields eased following yesterday’s rally, with the 2-year yield falling 2.7 basis points to 4.214% and the benchmark 10-year yield declining 1.8 basis points to 4.688%. The US Dollar was largely unchanged, with the US Dollar Index edging 0.01% higher to 99.83 as traders balanced ongoing geopolitical risks and higher energy prices against the latest moves in Federal Reserve rate expectations.
Oil prices continued to push higher as traders increasingly priced in the prospect of a prolonged closure of the Strait of Hormuz, and hostilities increased in the Red Sea, with the first reported deaths occurring there after a Houthi strike. Brent crude gained 1.22% to US$88.79 a barrel, while WTI rose 1.30% to US$83.20. The ongoing disruption is keeping concerns around global energy supplies and inflation firmly in focus, with further escalation in the region likely to provide additional support for oil prices.
Gold initially pushed higher again but ultimately pulled back after approaching longer-term resistance levels. The precious metal fell 0.49% to US$4,366.84 an ounce as traders continued to balance ongoing safe-haven demand against the recent recovery in US Treasury yields.
Dollar in Focus Ahead of CPI and Geopolitical Updates
The US Dollar is sitting relatively steady ahead of today’s key US CPI release, with traders looking for further clues on the Federal Reserve’s interest-rate outlook after last week’s much weaker-than-expected employment data. The poor jobs report has seen expectations for a September Fed rate hike ease, with Fed Funds futures now pricing around a 50% chance of a hike, down from 58% a week ago. Today’s inflation data could therefore provide an important catalyst for the dollar. A softer-than-expected CPI print would reinforce the recent disinflationary trend and could see traders further reduce rate-hike expectations, putting additional pressure on the USD. However, a stronger inflation reading could quickly revive expectations of further Fed tightening, particularly with renewed concerns over energy prices that have risen again in recent days over updates from the Middle East. Traders feel the higher-risk trade now sits with a surprise higher print, as this would add to the higher inflationary concerns that are already rising due to the energy price surge and would counteract the employment numbers from last week.
US CPI Set to Take Centre Stage
Geopolitical developments are once again expected to dominate sentiment through the day, with little on the event calendar in the first two trading sessions, although the focus will shift back towards fundamentals during the US session when the latest US CPI data is released. The market is expecting the headline CPI numbers to show a 0.2% month-on-month increase, with the year-on-year number printing a 3.4% increase, while the more closely watched Core data is expected to show 0.2% and 2.5% increases, respectively. The inflation numbers will be closely watched given the potential impact on Federal Reserve rate expectations, particularly after the recent weakness in US employment data.
