US Stocks Push to Fresh Highs as Markets Look Through Middle East Risks – S&P up 0.6%
US equity markets moved higher overnight, with technology stocks leading the gains as investors continued to cautiously price in the possibility that tensions in the Middle East may remain contained despite another volatile round of geopolitical headlines. The S&P 500 rose 0.61% to close at a fresh record high of 7,519, while the Nasdaq outperformed again, climbing 1.19% to 26,656. The Dow Jones lagged slightly, slipping 0.23% to finish at 50,461.
That improvement in risk appetite was reflected in bond markets, where Treasury yields fell sharply as traders took a more optimistic view of developments in the Gulf. US 2-year yields dropped 8.9 basis points to 4.032%, while the benchmark 10-year yield fell 7.3 basis points to 4.485%.
Currency markets also reflected improving confidence, with the US dollar strengthening broadly against the majors. The USD Index gained 0.18% to 99.16 as traders continued to favour the greenback amid elevated geopolitical uncertainty and diverging global growth expectations.
Commodity markets remained volatile throughout the session. Oil prices initially traded lower before reversing sharply higher into the close as supply concerns remained front of mind for energy traders. Brent crude rose 3.51% to $99.51 per barrel, while WTI crude climbed 3.76% to $93.89. In contrast, gold came under pressure from the stronger US dollar and easing safe-haven demand, falling 1.37% to $4,507.88 per ounce.
Correlations Break on Geopolitics – Volatility to Come
Markets spent much of the trading day yesterday digesting reports of fresh US strikes against Iran, even as peace negotiations continued in the background. Despite the conflicting developments, broader market sentiment remained relatively constructive, with investors appearing increasingly comfortable that the conflict may not escalate into a wider regional disruption. However, several correlations in terms of risk broke down, for example, the dollar pushing higher whilst US yields fell and growth stocks rose. Usually, in these circumstances, there will be a sharp correction for one or several products in the coming days, and many traders are expecting that in the coming sessions, with the situation in the Middle East seemingly coming to a head. If a deal is concluded, then expect stocks to continue to rise on investor optimism, with oil to drop hard and the dollar and yields to fall. However, if we do see a restart of serious hostilities – which feels likely if we see more strikes today – then we could see some hard moves as the market is forced to price in a longer conflict and higher oil prices for longer.
Geopolitics to Dominate Trading Sessions Again Today
Geopolitics looks set to dominate market moves today, with the situation between the US and Iran seemingly coming to a key juncture this week. However, there are some fundamental updates on the calendar which will also influence local markets. It is a busy Asian session today, with Australia and New Zealand firmly in focus. Australian CPI data headlines (exp +0.6% m/m, +4.4% y/y) kick off the local calendar, while the Reserve Bank of New Zealand delivers its latest interest rate decision. They are expected to keep rates on hold at 2.25%; however, the meeting will be live, with some in the market calling for a 25-basis-point hike to temper inflationary concerns. There is little else on the calendar to move the dial in the latter two sessions; however, traders are still expecting volatile markets, with any fresh headlines likely to lead to substantial moves.
