The financial world has been rocked by a flare-up of geopolitical risks, causing stock prices to slide – while triggering a flight to the market's safest corners such as bonds and the dollar. Oil rose.
Stocks suffered their worst day since January after a news report that Israel was preparing for an Iranian attack on government targets. About 40 launches were identified that came from Lebanese territory, some of which were intercepted, the Israel Defense Forces wrote in a post on X. US President Joe Biden said he expected Iran to attack Israel sooner rather than later – and His message to Iran is: “Don’t do it.”
Wall Street's “fear indicator” – the VIX – rose to levels last seen in October.
For Miller Tabak's Matt Maley, investors have been far too complacent about geopolitical issues.
“As gold and oil have priced in the significant impact of this crisis on the market, it is not impossible that the stock market will follow these other markets and soon experience an outsized reaction,” Maley noted.
The S&P 500 fell 1.5% on Friday, with banks and chipmakers leading the losses. The indicator recorded its largest weekly decline in 2024. The 10-year Treasury yield fell seven basis points to 4.52%. NatAlliance Securities' Andrew Brenner also pointed to “massive short covering” and interest rate locking ahead of an expected flood of debt issuance by banks after earnings.
The dollar had its best week since September 2022. Brent oil settled above $90. Gold topped $2,400 an ounce before giving back gains.
Treasury bonds rallied sharply after the market's two worst days since February, in which yields hit one-year highs after inflation readings dashed expectations of Federal Reserve interest rate cuts this year. Two-year bond yields, which briefly topped 5 percent this week, plunged on Friday.
“Risk was not on the menu on Friday,” said Fawad Razaqzada of City Index and Forex.com. “Investors were concerned about risk exposure in the lead-up to the weekend, concerned that risk assets could have a narrower gap if something were to happen.”
Tensions between Israel and Iran are increasing pressure
A direct confrontation between Israel and Iran would mean a significant escalation of the Middle East conflict and lead to a significant increase in oil prices, say Commerzbank analysts such as Carsten Fritsch.
Escalating geopolitical tensions – most recently in the Middle East, but also attacks by Ukraine on Russian energy infrastructure – have fueled bullish activity in the oil options market. There has been increased buying of call options – which profit from rising prices – in recent days, leading to a spike in volatility.
According to Jose Torres of Interactive Brokers, recent developments illustrate how vulnerable investor sentiment and high equity valuations are to geopolitical conflicts, persistent inflation and oil prices.
“Investors have tempered their expectations for the start of the Fed's easing cycle – with geopolitics potentially replacing the Fed as one of the biggest influencers of market volatility,” he noted.
Earnings season is beginning on Wall Street
As Wall Street's earnings season begins, results from major banks offered a fresh glimpse into the U.S. economy's performance amid interest rate trends clouded by persistent inflation.
JPMorgan Chase & Co. and Wells Fargo & Co. both reported net interest income – the income they earn from lending – that fell short of estimates amid rising financing costs. Citigroup Inc.'s profit beat analysts' estimates as companies tapped markets for financing and consumers turned to credit cards, signs that a prolonged period of elevated interest rates will benefit big banks.
“Many economic indicators remain positive. “Looking forward, however, we remain alert to a number of significant uncertain forces,” JPMorgan Chief Executive Officer Jamie Dimon said. He pointed to the wars, growing geopolitical tensions, ongoing inflationary pressures and the impact of quantitative tightening.
Low influence of economic data
Meanwhile, recent economic data did little to change Friday's reduced risk appetite – consumer sentiment deteriorated as inflation expectations rose.
Larry Fink, chief executive of BlackRock Inc., said he expects the Fed to cut interest rates no more than twice this year and that it will be difficult for the central bank to contain inflation.
Fink told CNBC he would “call it a win” if inflation was between 2.8% and 3%, above the Fed's 2% target.
Pacific Investment Management Co. warned that the Fed could move back to raising interest rates if inflation rises in the U.S. – with the asset manager preferring to buy bonds in other markets.
“If inflation picks up again, there is a possibility that the Fed will raise interest rates instead of cutting them,” said Mohit Mittal, chief investment officer for core strategies at Pimco, in an interview with Bloomberg Television.
Traders have also been keeping an eye on the latest Fedspeak. A number of officials stressed Friday that there was no urgency to cut interest rates, citing still-high inflation and a robust labor market.
This included comments from both Susan Collins of the Boston Fed and Mary Daly of San Francisco. Atlanta's Raphael Bostic reiterated his view for a rate cut late in the year, and Kansas City's Jeffrey Schmid said he favored a “patient” approach to cuts.
While changing expectations about the timing and speed of the first interest rate cuts will likely lead to further yield volatility in the near term, UBS's Chief Investment Office believes the bigger point is that the Federal Reserve remains prepared to do so this year to begin easing.
Since the likelihood that the Fed will have to raise rates further is low, the CIO maintains a positive outlook on quality bonds.
“We continue to favor quality bonds in our global portfolios and encourage investors to secure attractive yields before interest rates fall this year,” said Solita Marcelli of UBS Global Wealth Management. “We like bonds with a maturity of 1 to 10 years as well as sustainable bonds.”
“We also believe investors should consider active exposure to fixed income to improve diversification,” she concluded.
Company highlights
- The shareholders of United States Steel Corp. voted in favor of a takeover offer from Nippon Steel Corp. to the tune of $14.1 billion, leaving the fate of the deal for the iconic American steelmaker up to U.S. regulators and politicians.
- BlackRock Inc.'s long-term mutual funds posted net inflows of $76 billion in the first quarter, helping the world's largest asset manager reach a record $10.5 trillion in client assets.
- Exxon Mobil Corp. formally approved its sixth oil production in Guyana, which will make the Latin American country a larger crude producer than OPEC member Venezuela.
- Beijing has given telecommunications providers such as China Mobile Ltd. ordered to replace foreign chips in their core networks by 2027, the Wall Street Journal reported, citing people familiar with the matter.
- Activist investor Barington Capital Group LP is calling on Paramount Global to end exclusive talks with media mogul David Ellison and explore competing proposals, including one from Apollo Global Management Inc.
Some of the key moves in the markets:
Shares
- The S&P 500 fell 1.5% as of 4 p.m. New York time
- The Nasdaq 100 fell 1.7%
- The Dow Jones Industrial Average fell 1.2%
- The MSCI World Index fell 1.2%
Currencies
- The Bloomberg Dollar Spot Index rose 0.7%
- The euro fell 0.8% to $1.0637
- The British pound fell 0.8% to $1.2447
- The Japanese yen was little changed at 153.26 per dollar
Cryptocurrencies
- Bitcoin fell 5.2% to $66,823.88
- Ether fell 8.8% to $3,214.92
Tie up
- The 10-year Treasury yield fell seven basis points to 4.52%
- The 10-year German government bond yield fell 10 basis points to 2.36%
- The 10-year UK government bond yield fell six basis points to 4.14%
raw materials
- West Texas Intermediate crude rose 0.6% to $85.54 a barrel
- Spot gold fell 1.3% to $2,342.74 an ounce
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