Stocks Drop as Middle East Conflict Continues – S&P down 0.8%
Global stock markets remained under pressure yesterday as the conflict between Israel and Iran rolled into a fifth day with little sign of a ceasefire. All three of the major US indices fell in trading yesterday: the Dow dropped 0.70%, the S&P lost 0.84%, and the Nasdaq closed 0.91% lower. The dollar pushed higher, the DXY up 0.62% to 98.80, while US yields pulled back ahead of today’s Fed meeting conclusion—the 2-year down 1.5 basis points to 3.952% and the benchmark 10-year down 5.7 basis points to 4.389%. Oil prices surged again as supply concerns increased as the conflict continued, Brent up 5.18% to $77.02 and WTI up 4.28% to $74.84. Gold traded in a quieter range, eventually closing up 0.16% on the day at $3,388.37.
Federal Reserve Bank in Focus Today
Despite the plethora of geopolitical updates that are hitting newswires at the moment and the impact that they are having on financial markets, investors are expecting to see the focus sweep back to fundamentals later today when the Federal Reserve Bank announces its latest interest rate decision. The bank is 99.9% priced in to keep rates on hold at 4.25%–4.50% as it remains in a ‘wait and see’ mode with regard to data and the uncertainty of tariff and fiscal policy impact in the coming months. Inflation data has started to pull back, with both CPI and PPI data last week coming in under expectations, and jobs numbers have been softening. However, the potential inflationary impact of US tariffs is concerning Fed members, and markets are not pricing in the possibility of a rate cut until September. The odds remain close to 50% that it will happen then. The focus for traders will be on the forward guidance that we get from the statement, dot plot, and press conference, with anything less dovish likely to see the dollar rally, whilst any indication that we will see two rate cuts before next year is likely to see the dollar sink further to fresh annual lows.
Geopolitics and the Fed on the Calendar Today
Once again, geopolitical factors are set to dominate financial markets today, with updates from the Middle East likely to be front of mind for most traders. There are, however, some macroeconomic events that will take focus away from the newswires—however temporarily. There is nothing on the calendar of note in the Asian session today; however, UK markets will come into sharp focus on the London open with the latest key CPI data due out. Expectations are for a 3.3% year-on-year print, and anything off that could see big moves in the pound—which took a hit in yesterday’s trading. The New York open sees the release of the Weekly Unemployment Claims numbers (exp. 246k), which are out a day early due to a US holiday tomorrow, and we are then due to hear from Bank of Canada Governor Tiff Macklem before the big Fed event towards the end of the session.
