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MSCI's global index and US Treasury yields fell on Tuesday amid growing uncertainty. Investors stayed away from risky assets, while oil futures rose on concerns about supply disruptions as the Middle East escalates following Iran's attack on Israel.
Still, U.S. stocks closed above intraday lows and U.S. Treasury yields also stabilized as market participants remain hopeful that further escalation in the region is not inevitable despite the tense situation.
Iran fired a series of ballistic missiles into Israel on Tuesday in response to Israeli strikes on Tehran-backed Hezbollah positions in Lebanon. Washington condemned Iran's actions and said it was consulting with Israel on a possible response after the U.S. military backed Israel to repel the attack.
Amid geopolitical tensions, the U.S. dollar strengthened and gold, traditionally seen as a safe haven asset during crises, rose more than 1% during the trading session. Investors continued to seek safe havens amid fears of further instability in the region.
Oil prices also rose on concerns that an escalation in the conflict could cause supply disruptions. Any disruption to oil transportation could put significant pressure on global energy markets.
In addition to geopolitical risks, investors in the US face other challenges. Hurricane Helen is threatening the coast, and a strike by port workers has paralyzed almost half of the shipping on the east and south coasts of the US. Negotiations on new contracts with port owners have so far failed to yield results, fueling fears of further supply disruptions.
These factors are creating a tense environment in global markets, forcing investors to seek safe havens and avoid risk in the near term.
US stocks came under additional pressure after the S&P 500 and Dow Jones hit record highs yesterday. The situation was exacerbated by several negative factors at once, from port strikes to the aftermath of a hurricane and escalation in the Middle East.
"The market has been euphoric, but now it's time to soberly assess the risks. The hurricane, the strikes and the Iranian missiles are serious blows to investor confidence," said Carol Schleiff, chief investment officer at BMO Family Office. In her opinion, the situation is such that any negative event could significantly change the direction of trading.
She explained that the strike by port workers is already disrupting supply infrastructure on the East Coast, and the aftermath of Hurricane Helene is adding to the uncertainty. But the third factor, according to the expert, poses the greatest threat - the launch of Iranian missiles at Israel, which could easily escalate into a more serious conflict.
The growing tension in the international arena supported the dollar exchange rate and also increased demand for US Treasury bonds. According to Shleif, investors are now being cautious and prefer assets with minimal risks, hoping that the situation will stabilize and not escalate into a full-scale crisis.
Oil prices on world markets initially soared, but then partially retreated from their daily peaks. Clay Seigle, an independent political risk analyst, emphasized that any Israeli attack on Iranian oil facilities could lead to significant supply disruptions, potentially reducing exports by more than a million barrels per day.
"An escalation in this region could lead to major disruptions in the energy market, which would immediately affect the global economy," Seigle said. He also added that the likelihood of further gains in oil prices remains high, given the fragility of supplies in the region.
On Tuesday, U.S. oil rose by 2.44%, reaching $69.83 per barrel, while European Brent rose by 2.59% to $73.56. Earlier in the day, both benchmarks had risen more than 5%, indicating nervousness among market participants.
US stock markets were tense. The Dow Jones Industrial Average fell 173.18 points, or 0.41%, to close at 42,156.97. The broader S&P 500 Index fell 53.73 points, or 0.93%, to 5,708.75. The tech-heavy Nasdaq Composite Index fell 278.81 points, or 1.53%, to 17,910.36.
The current market situation reflects investors' fears of a possible increase in geopolitical risks, which could have a serious impact on all key assets, from stocks and bonds to commodities.
Global markets ended the trading session lower. The MSCI index, which tracks stocks around the world, lost 6.09 points, or 0.71%, to close at 845.69. European markets also failed to stay afloat, with the STOXX 600 index falling 0.38%, indicating general investor anxiety.
The CBOE Volatility Index, known as Wall Street's "fear" gauge, jumped to 19.25, its highest since early September. The jump reflects market jitters fueled by global risks and geopolitical uncertainty.
Safe havens such as the Japanese yen and the Swiss franc posted significant gains as traders sought safety amid concerns over an escalation in tensions between Iran and Israel. Investors began to look to more stable instruments, reacting to rumors of possible strikes long before the news was officially confirmed.
The US dollar also posted strong gains amid strong US employment data and tough comments from Federal Reserve Chairman Jerome Powell. Powell reiterated the need to stick to current monetary policy on Monday, reducing expectations for sharper interest rate easing. Against this backdrop, the dollar index, which tracks the dollar against a basket of major currencies, rose 0.45% to 101.20.
The euro lost ground, falling 0.58% to $1.1069. The dollar, despite the overall strengthening, was unable to hold its ground against the Japanese yen, showing a slight decline of 0.08% to 143.51. Investors once again preferred the Japanese currency amid growing tensions in Asia and concerns about slowing growth in Europe.
In search of safety, investors switched their attention to US Treasuries, which led to a decrease in yields on the long and short sections of the curve. The yield on the 10-year Treasury note fell by 6.3 basis points to 3.739%. The yield on 2-year notes, which closely tracks expectations for the Fed's future rate, fell 4.3 basis points to 3.6084%.
These indicators indicate that market participants are preparing for further turbulence and a reduction in risky investments, switching to more reliable assets. The observed dynamics demonstrate an increase in defensive sentiment and a tendency of investors to avoid significant risks.
Instability in the Middle East has forced investors to switch to traditional safe-haven assets. Jim Barnes, director of fixed income at Bryn Mawr Trust, noted that markets are currently taking a wait-and-see approach. "We are watching and hoping that the current calm will last. Otherwise, the market's attention will shift to the long-term consequences," he said.
Amidst geopolitical instability, precious metals have once again taken center stage. Spot gold rose 0.91% to $2,658.39 an ounce, while U.S. gold futures rose 0.95% to $2,661.10 an ounce. This indicates a strong desire among investors to protect their assets while the situation on global markets remains tense.
Despite the overall decline in stock indices, energy stocks have shown growth. Amid rising oil prices, which increased by 2.4%, Exxon Mobil shares rose by 2.3%. This underscores the high sensitivity of the energy sector to any changes in the hydrocarbon market.
Defense stocks have turned out to be among the main beneficiaries of the current geopolitical tensions. Northrop Grumman gained 3%, while Lockheed Martin jumped 3.6%. The S&P 500 aerospace and defense index set a new record, indicating strong interest in companies related to the defense and security industries.
Amid general anxiety, utilities were also feeling confident, with the S&P 500 utilities index gaining 0.8%. This is a typical market reaction in uncertain times, when investors seek stable and dividend-paying assets to hedge against sharp fluctuations.
Airline stocks were among the losers amid recent events. Large players such as Delta Air Lines lost 1.6% amid concerns that geopolitical instability and rising fuel prices will negatively affect the carriers' operations. These dynamics highlight the vulnerability of the aviation sector to any external shocks, including both military conflicts and natural disasters.
Amid these events, investors continue to seek safe havens, trying to minimize risks and preserve capital in conditions when the global economy is under pressure from all sides.
With geopolitical risks growing, experts are noticing increased nervousness among investors. Peter Tooze, president of Chase Investment Counsel, warns that a possible escalation of the conflict could put serious pressure on stock markets. "If the situation continues to escalate, we could see a prolonged decline, as investors fear unpredictable consequences," he said. In his opinion, even the positive dynamics observed earlier this year may not prevent market participants from massive sell-offs if the situation escalates.
Data released on Tuesday showed mixed results for the U.S. economy. Job openings increased in August, suggesting a stable labor market. However, the Institute for Supply Management's (ISM) manufacturing activity index came in at 47.2, below analysts' expectations of 47.5. That suggests a continued slowdown in the manufacturing sector and heightens concerns about further economic growth.
Investors are focusing on upcoming labor market data, including initial jobless claims on Thursday and the monthly employment report on Friday. These numbers could influence the Federal Reserve's policy decisions. According to CME Group's FedWatch tool, traders are pricing a 38% chance of a 50 basis point rate cut in November, up from 35% on Monday but well below the 58% seen a week ago. The current sentiment underscores that uncertainty remains as the market tries to adjust to new conditions.
On September 18, the US Federal Reserve cut its interest rate by 50 basis points, the first step in a new round of monetary easing. The move signaled that the regulator intends to support the economy amid growing global risks. However, subsequent events have cast doubt on the effectiveness of the move, and market participants are now focused on what measures will follow.
The situation at US ports remains tense. The strike by workers on the East Coast and Gulf Coast has stopped almost half of all shipping, which has already negatively affected logistics and supply chains. Negotiations for a new contract have not yet yielded results, adding to the uncertainty for businesses and investors. This factor adds another layer of risk to the overall picture, and markets are closely monitoring developments.
Amid all these changes, market participants are showing caution, carefully analyzing incoming economic data and trying to minimize their risks in an environment of high volatility.
While the strike by port workers in the US is unlikely to cause the same large-scale supply problems as during the peak phases of the COVID-19 pandemic, it still adds significant uncertainty to the economic outlook. Experts note that the halt in shipping could make it difficult to assess overall economic stability, which in turn complicates the Federal Reserve's task of choosing the optimal monetary policy.
Negative sentiment prevailed in the US stock market. On the New York Stock Exchange (NYSE), the number of stocks declining outnumbered those advancing by a ratio of 1.32 to 1. Even more pronounced pressure was felt on the tech-heavy Nasdaq, where the ratio was 2.36 to 1 in favor of falling stocks. This indicates that investors, fearing a possible deterioration in the situation, prefer to reduce positions and take profits.
During the day, the S&P 500 index recorded 51 new 52-week highs and only two new lows, which indicates some optimism among certain sectors. At the same time, the situation on the Nasdaq looked less positive: 75 new highs and 137 fresh lows underscore the high volatility and disunity in the dynamics of securities.
Amid increased nervousness, trading volumes on American exchanges increased significantly. The total number of shares that changed hands was 13.16 billion, which is significantly higher than the average daily figure of 11.98 billion shares over the past 20 sessions. Such an increase in volume indicates that market participants are actively reacting to current events, adjusting their strategies in the face of increasing uncertainty.
The current situation on the stock markets reflects the general concern of investors and their desire to quickly respond to changes in the geopolitical and economic background. In the near future, the key factor will be stabilization or further deterioration of the situation, which will determine the mood and vectors of movement for global assets.
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