Stoked Tensions in Middle East Take a Toll on Wall Street's Mood
The Middle East's ongoing conflict causes a wave of uncertainty on Wall Street
Wall Street feels indifferent after the Federal Reserve's decision
Give or take, the troubling situation brewing in the Middle East is causing quite a stir on U.S. stock exchanges. The jury's still out on whether President Trump will intervene or keep a hands-off approach in the unfolding scenario, but the odds of him stepping in are still inconclusive. As the Federal Reserve decided to keep interest rates steady, that decision was met with an expected shrug by the market. Ahead of the long weekend, investors are keeping their cool.
After Tuesday's losses, U.S. stock markets managed to steady themselves midweek. The Dow Jones Index slipped 0.1 percent to 42,172 points. The S&P-500 closed virtually unchanged, while the Nasdaq Composite gained a negligible 0.1 percent. On the NYSE, 1,571 stocks rose (previously 882 sank), 1,204 (originally 1,887 failed to impress), and 56 (71 previously held their ground).
Economy: Forecasts Trimmed, Fed Stays Put on Rate Hike
In a nutshell, the Federal Reserve's rate decision didn't disappoint. As predicted, the Fed decided to keep its key interest rate stable and hinted at the possibility of more rate reductions towards the year's end. However, the Fed's economic projections were scaled back. Fed Chairman Jerome Powell also noted the elevated inflation risks stemming from the U.S.'s trade policy and ongoing Middle East conflict. Cautious investors might have held back due to these reasons, as U.S. markets will be shuttered on Thursday in observance of Juneteenth. With the holiday weekend in mind, Friday could serve as the bridge day, potentially contributing to the market's restraint.
Economy: Trump Steps Up as Fed Chairman Contender
Meanwhile, tension in the Middle East paints a conflicted picture for Wall Street. While Trump has intensified the situation with Iran by boosting demands for Iranian surrender, Tehran firmly rejected those demands and ruled out any prospective capitulation. The war between Israel and Iran continues to hang over market sentiment but doesn't offer a clear picture of whether the U.S. will enter the fray. It remains unclear whether the U.S. will engage directly in the conflict, however, Trump clarified that the U.S. doesn't plan on targeting Iran's Supreme Leader Ali Khamenei at this time. Investors have been left scratching their heads, trying to decipher Trump's statements and treading cautiously by betting on the U.S.'s absence from the conflict.
Oil Prices: Volatile Swings - U.S. Oil Stocks Offer Minimal Support
News concerning the Middle East's situation shapes the volatility and unpredictability of oil prices. They take a dive at times, with Trump's statements that Iran is willing to send a delegation to Washington for discussions weighing on the prices. Conversely, the substantial drop in U.S. crude oil stocks the previous week provides some underpinning support. Ultimately, U.S. WTI experienced minimal change whilst Brent weakened. Gold yielded some ground following the Fed's decision, with the troy ounce slipping 0.6 percent. Gold buyers outside of the dollar zone may have taken advantage of some profit-taking, as the dollar gained somewhat, raising the cost of gold.
On the Bond Market
Yields recovered from an initial decline after the Fed's decision, keeping the yield on 10-year U.S. Treasury notes relatively steady at 4.39 percent. Weak housing starts for May fueled speculation about declining interest rates in the second half of the year, while weekly jobless claims remained roughly on par with expectations, providing little insight into future interest rate policy.
The Dollar Index: Bid Farewell to the Greenback?
The dollar index turned green post-rate decision, putting on an additional 0.1 percent. If the U.S. joins the conflict, the greenback could continue to lose ground, as suggested by MUFG Bank. A U.S. intervention could potentially speed up the resolution of the conflict and diminish Iran's incentive to interfere with oil supply, which could lead to an oil price correction and put downward pressure on the dollar.
Stocks on the Move: Hasbro, Circle Internet, Zoetis, and La-Z-Boy
Hasbro shares gained 0.6 percent. The toy manufacturer is cutting 3 percent of its global workforce to streamline costs amid turbulent trade policies. Circle Internet skyrocketed 33 percent, with the stablecoin company potentially looking to reap the rewards of impending regulatory relaxation. Zoetis dropped 4.1 percent following a Stifel downgrade. La-Z-Boy shares fell 1.3 percent after mixed earnings results.
Source: ntv.de, mau/DJ
- Wall Street
- Fed
Enrichment Data:
The Middle East conflict, in particular the Israel-Iran escalation in Q2 2023, had a notable impact on U.S. stock markets and oil prices:
Impact on U.S. Stock Markets:
- U.S. equity markets came under pressure following the significant escalation in the Israel-Iran conflict, reflecting investor concerns about regional spillover effects and potential negative implications for global growth and inflation[1].
- The S&P 500 index was affected, with RBC analysts warning the conflict could cause the S&P 500 to drop as much as 20% if the conflict widens or prolongs[3].
- The conflict increased geopolitical uncertainty, which historically tends to contract the price-to-earnings ratio, making stock valuations vulnerable. At the time, valuations were near record highs, increasing market susceptibility to negative shifts[3].
- Market sentiment turned negative with travel and hotel sectors particularly pressured as hopes for a quick ceasefire diminished. Major indexes like the S&P 500, Dow Jones, and Nasdaq 100 experienced downward movement during this period[5].
- Despite the turbulence, the U.S. dollar showed only slight appreciation, indicating a reduced "safe haven" status compared to past crises[1].
- Investors flocked to traditionally safe assets such as U.S. Treasury bonds (yields dropped) and gold (prices remained elevated), demonstrating risk aversion amid the conflict[4].
Impact on Oil Prices:
- Oil prices surged due to fears of supply disruptions linked to the conflict. Brent crude rose by about 0.33% to $76.70 per barrel, and U.S. crude increased by 0.45% to $75.18 per barrel during the conflict escalation[4].
- These gains were on top of a prior sharp increase of approximately 4% in oil prices, reflecting market anxiety over geopolitical risks in the Middle East[4].
- The rise in oil prices contributed to broader inflation concerns, influencing the cautious stance of investors toward equities[1][4].
In summary, the Q2 2023 Israel-Iran conflict escalation led to increased volatility and downward pressure on U.S. stock markets due to higher geopolitical risk and uncertainty, while simultaneously driving up oil prices amid fears of supply interruptions. Safe-haven assets like gold and U.S. Treasuries benefited from heightened risk aversion during this period[1][3][4][5].
The Commission has shown that the ongoing Middle East conflict, specifically the Israel-Iran escalation, has been a significant factor in shaping the politics of general-news, affecting not only Wall Street but also global oil prices. The Federal Reserve's decision to keep interest rates steady and the potential for more rate reductions towards the end of the year, despite the elevated inflation risks from U.S. trade policy and the Middle East conflict, is a major factor in sports betting, as cautious investors might choose to hold back due to these reasons.
