US stocks fell and bonds deepened losses as the Iran war showed no signs of de-escalation, heightening fears of a lengthy disruption to energy markets and a surge in inflation. Brent briefly topped $85.
In a broad selloff, the S&P 500 sank 2% toward its lowest since December. As soaring energy prices cast a pall over the ability of central banks to keep inflation in check, traders are now betting on fewer chances of two Federal Reserve rate cuts in 2026. Ten-year yields were set for their biggest two-day advance since April. The dollar rose. Gold halted a four-day rally.
“Markets are repricing for the risk of a more extended Iran war,” said Krishna Guha at Evercore. “The duration of higher oil and gas is key.”
Stocks on the Move
- The S&P 500 fell 2.1% as of 10:15 am in New York
- The Nasdaq 100 fell 2.1%
- The Dow Jones Industrial Average fell 2.3%
- The Stoxx Europe 600 fell 3.3%
- The MSCI World Index fell 2.6%
The Iran war reverberated across the Middle East, with Tehran sending missiles at Qatar, Bahrain and Oman. Doha said targets weren’t limited to military interests. Israel said that it struck the leadership compound in Tehran and sent soldiers into southern Lebanon. Two drones struck near the US embassy in Riyadh, causing limited damage.
An adviser to Iran’s Islamic Revolutionary Guard Corps commander told State TV that forces “will set fire to any ship attempting to pass through” Strait of Hormuz. While oil production in the region remains largely unaffected, flows through the vital shipping lane have been “significantly impacted,” the International Energy Agency said in a document seen by Bloomberg News.
Currencies & Bonds
- The Bloomberg Dollar Spot Index rose 1.1%
- The euro fell 1.2% to $1.1548
- The British pound fell 1% to $1.3271
- The Japanese yen fell 0.2% to 157.75 per dollar
- The yield on 10-year Treasuries advanced four basis points to 4.07%
- Germany’s 10-year yield advanced six basis points to 2.77%
- Britain’s 10-year yield advanced 14 basis points to 4.51%
Any suggestion that flows through this chokepoint could be restricted is enough to unsettle commodity desks, and recent developments have done exactly that, according to Fawad Razaqzada at Forex.com.
“Markets are trading headline to headline. Energy is bid, equities are uneasy, and volatility is back on the agenda. Much will depend on whether tensions stabilise— or whether this proves to be the start of a more prolonged disruption to global supply,” he said.
About 95% of the shares in the S&P 500 fell. The Russell 2000 index of small firms sank 3.5%. The yield on 10-year Treasuries climbed six basis points to 4.09%. The dollar rose 1%.
A prolonged conflict in the Middle East pushing oil to $90-$100 for a sustained period would be a significant headwind for the global economy, according to Jennifer McKeown at Capital Economics.
“Importers such as the eurozone would be hit hardest, while damage to production and export capacity would cap gains for exporters in the Middle East itself,” she said. “The adverse effects should be limited by central banks ‘looking through’ the shock and avoiding rate hikes, but cuts would probably be delayed.”
Commodities Check
- West Texas Intermediate crude rose 8.4% to $77.18 a barrel
- Spot gold fell 5.4% to $5,035.53 an ounce
- Brent crude briefly tops $85/barrel
Barring a prolonged disruption of global oil supplies, the conflict is unlikely to end the cyclical stock bull market by itself, according to Ed Clissold and Thanh Nguyen at Ned Davis Research, who has been tracking crisis events for decades—logging 59 since 1907.
The market has tended to decline during the event itself, by an average of 7% and a median of 3%, they noted. Once the crisis has passed, the market has recovered within a few months, on average. The exceptions have been when a crisis damages the economy, such as the Bear Sterns collapse in 2008 or Arab oil embargo in 1973.
“Assuming hostilities subside in the coming days or weeks, we would expect the market reaction to be similar to the majority of crisis events,” said the NDR strategists.
Corporate Highlights
- Target Corp. forecast better-than-expected profit for the full year, indicating the big-box retailer’s turnaround plans are starting to generate results.
- Best Buy Co. reported profit for the holiday-shopping season that was better than expected.
- Apple Inc. updated its two main laptop computer lines, adding faster processors to the MacBook Air and MacBook Pro and raising prices amid an industrywide memory crunch.
