(Bloomberg) — An escalation of tensions in the Middle East kept stock markets on edge, though haven assets including bonds and the dollar gave up some early gains after Iranian media appeared to downplay the impact of Israeli strikes.
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Treasuries pared an early move that drove the 10-year yield as much as 14 basis points lower after Israel launched a retaliatory attack on Iran less than a week after Tehran’s rocket and drone barrage, according to two US officials.
Oil wiped out an earlier sharp jump above $90 a barrel and the dollar gave up some early gains. An Iranian military official signaled Tehran doesn’t feel compelled to react to the blasts which US officials say were caused by Israeli strikes, with semi-official Mehr agency quoting Army Commander-in-Chief Abdolrahim Mousavi saying Tehran has already reacted to Israeli threats.
“Markets tend to initially overreact,” Nathan Sheets, global chief economist at Citigroup Inc., said in an interview with Bloomberg TV. “That overreaction reflects that uncertainty premium when it first erupts but typically these events end up being less disruptive than we feared they might be.”
The latest moves cap a dismal week for markets after solid economic readings and hawkish Fedspeak reinforced speculation that US interest rates will remain higher for longer. The Stoxx Europe 600 index fell 0.7%, set for a third straight week of losses. Futures on the S&P 500 and Nasdaq 100 were down 0.5% and 0.8% respectively.
“Even in the absence of an escalation, the combination of mixed earnings and geopolitical headwinds this week have been a catalyst for crowded equity longs to unwind,” said Viraj Patel, global macro strategist at Vanda Research.
As traders come to grips with a resilient US economy and sticky inflation, they’ve been forced to scale back bets on rate cuts this year. New York Fed President John Williams said while it isn’t his baseline expectation, even a rate hike is possible if warranted. His Atlanta counterpart Raphael Bostic said he doesn’t think it will be appropriate to ease until toward the end of 2024. The Fed may hold rates steady all year, Minneapolis Fed chief Neel Kashkari told Fox News Channel.
Among individual movers, Taiwan Semiconductor Manufacturing Co. dropped after the company revised down the revenue growth outlook for the chip industry, citing a softer recovery across smartphone and personal computer sectors. Infosys Ltd. slumped in the US after forecasting tepid sales growth for the year.
Key events this week:
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BOE Deputy Governor Dave Ramsden and ECB Governing Council member Joachim Nagel speak, Friday
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Chicago Fed President Austan Goolsbee speaks, Friday
Some of the main moves in markets:
Stocks
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The Stoxx Europe 600 fell 0.7% as of 10:08 a.m. London time
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S&P 500 futures fell 0.5%
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Nasdaq 100 futures fell 0.8%
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Futures on the Dow Jones Industrial Average fell 0.4%
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The MSCI Asia Pacific Index fell 1.7%
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The MSCI Emerging Markets Index fell 1.6%
Currencies
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The Bloomberg Dollar Spot Index rose 0.1%
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The euro was little changed at $1.0651
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The Japanese yen rose 0.1% to 154.47 per dollar
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The offshore yuan was little changed at 7.2530 per dollar
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The British pound was little changed at $1.2446
Cryptocurrencies
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Bitcoin rose 1.7% to $64,603.34
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Ether rose 1.3% to $3,109.81
Bonds
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The yield on 10-year Treasuries declined five basis points to 4.58%
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Germany’s 10-year yield declined three basis points to 2.46%
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Britain’s 10-year yield declined two basis points to 4.25%
Commodities
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Brent crude rose 0.3% to $87.39 a barrel
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Spot gold rose 0.3% to $2,385.37 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Isolde MacDonogh, Anna Edwards and Kriti Gupta.
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