Stocks Hit on Fresh Geopolitical Concerns – Nasdaq down 1.5%
Global financial markets turned decidedly risk-off overnight as tensions in the Middle East escalated further, with the United States announcing it had reinstated its blockade of Iranian shipping through the Strait of Hormuz. The move reignited concerns over global oil supplies and inflation, prompting investors to reduce exposure to risk assets while driving a sharp rally in energy prices.
US equity markets closed lower across the board, led by another heavy sell-off in the technology sector. The Dow Jones Industrial Average slipped 0.26% to 52,498, while the S&P 500 fell 0.79% to 7,515. The Nasdaq underperformed once again, declining 1.55% to finish at 25,873 as investors continued to rotate away from higher-growth stocks.
The renewed geopolitical uncertainty also pushed US Treasury yields sharply higher as markets priced in the inflationary impact of rising oil prices. The 2-year Treasury yield climbed 7.4 basis points to 4.282%, while the benchmark 10-year yield rose 6.3 basis points to 4.624%. The US Dollar Index strengthened by 0.31% to 101.27, supported by safe-haven demand and expectations that higher energy prices could complicate the Federal Reserve’s inflation outlook.
Energy markets experienced their strongest session in months, with fears of supply disruptions through the Strait of Hormuz triggering a broad-based rally. Brent crude surged 9.59% to settle at $83.30 per barrel, while WTI crude jumped 9.42% to $78.14 per barrel. The sharp rise in oil prices fuelled concerns that inflationary pressures could remain elevated despite expectations for softer US inflation data later today. Gold moved in the opposite direction, falling 2.90% to $4,000.65 an ounce by the NY Close.
Gold Under Pressure Again – Testing Key Support
Gold fell towards key support levels in trading yesterday as increased hostilities in the Middle East heavily influenced market moves. While geopolitical uncertainty would typically support the precious metal, the stronger US dollar and higher Treasury yields proved to be the dominant influences during the session, and indeed over the last few months. It is trading around the key $4,000 level, which also coincides with key trendline support on the daily chart, at the start of the trading day, and any further escalation in the conflict between the US and Iran could see these levels break. The annual low is at $3,942.99, and a further break of this level could open the way for a much deeper correction. Any improved sentiment should let bulls back into play, with Gold likely to lift back into recent ranges. Either way, it is not likely to be trading around these levels for too long.
Geopolitics to Dominate Key Fundamental Updates
Geopolitics, and in particular news from the Middle East and all the associated concerns, are set to dominate market sentiment today, despite some key fundamental data releases and central bank updates. There is little of note on the calendar in the Asian session, and the London session will see an early focus on UK markets when Bank of England Governor Andrew Bailey speaks early in the day. However, the major fundamental focus will be on US inflation data, due for release shortly after the New York open. Headline CPI numbers are expected to show a 0.1% decline, while the core data should rise 0.3% from a previous 0.2% increase. The key year-on-year number is expected to remain at +2.9%, still well above the Fed’s 2% target. Markets will also hear from Federal Reserve Chairman Kevin Warsh later in the US session. Under normal circumstances, these events would be the primary drivers of market sentiment. However, investors are likely to remain firmly focused on developments in the Middle East, with geopolitical headlines expected to continue overshadowing the economic calendar.
