US Stocks Mixed as Oil Extends Sharp Decline on Middle East Optimism – Dow up 0.5%
US financial markets delivered a mixed performance overnight as investors continued to respond positively to signs of easing tensions in the Middle East. Sentiment improved after President Trump stated that the US was having “good talks” with Iran, raising hopes that diplomatic progress could eventually lead to increased oil exports through the Strait of Hormuz and help alleviate concerns over global energy supply.
The prospect of improving supply conditions weighed heavily on crude oil prices, with Brent crude tumbling 9.26% to US$87.82 a barrel, while West Texas Intermediate (WTI) fell 8.19% to US$82.00. The sharp decline in energy prices also helped ease inflation expectations, supporting a rally in US government bonds.
Treasury yields moved lower across the curve, with the benchmark 10-year yield falling 3.2 basis points to 4.645%, while the more policy-sensitive 2-year yield eased 1.0 basis point to 4.320%. The decline in yields provided support for precious metals, with gold rising 0.56% to US$4,075.28 an ounce.
On Wall Street, equity markets finished mixed as investors balanced the positive impact of falling energy prices against ongoing geopolitical uncertainty. The Dow Jones Industrial Average outperformed, climbing 0.51% to close at 52,210. The broader S&P 500 was little changed, edging 0.02% higher to 7,413, while the technology-heavy Nasdaq slipped 0.18% to finish at 24,932 as some investors continued to rotate away from high-growth technology stocks.
Despite lower Treasury yields, the US dollar continued to edge higher, with the US Dollar Index gaining 0.07% to 101.54 as investors maintained a cautious stance toward global markets.
Fed Hike Concerns Weighing on Some Markets
There was another breakdown in some key correlations in trading yesterday as some pending key fundamental updates exerted themselves on the market in advance of dramatic updates in the Middle East. Oil prices dropped to their lowest levels in over a week yesterday as news that the US and Iran were again talking increased optimism for a solution in the Strait of Hormuz. However, US yields and the dollar, which have usually dropped hard on positive peace talks over the last few months, remained resolutely bid. We would also expect to see a bit of a knee-jerk rally in stocks, which we also didn’t see in trading yesterday, so it looks like investors are strongly turning their attention to tomorrow’s FOMC meeting conclusion and the very real possibility, currently priced at around 40%, of a Fed rate hike.
Quiet Calendar Day – Geopolitics to Dominate
It is another relatively quiet day ahead on the macroeconomic calendar, and once again, investors are expecting geopolitical updates to dominate sentiment. During the Asian session, markets will monitor comments from RBA Governor Michele Bullock for any clues on the outlook for Australian interest rates. The London session has very little scheduled on the calendar to move markets. However, later in the US session, the Conference Board Consumer Confidence survey (exp. 92.4) will provide an update on the health of the US consumer. However, as above, with limited economic data scheduled, traders are likely to remain focused on developments in the Middle East, with any further geopolitical headlines expected to remain the key driver of market sentiment.
