Stocks took a hit today with tensions escalating in the Middle East and investors processing Morgan Stanley’s underwhelming earnings report. The Dow Jones Industrial Average dipped by around 0.6%, the S&P 500 by 0.8%, and the Nasdaq Composite by 0.7%.
In the bond market, the 30-year Treasury yield breached the 5% mark, and the 10-year Treasury yield soared past 4.9%, levels not seen since 2006, signaling growing investor apprehension.
The market’s nerves were frayed as accusations flew between Israeli and Palestinian authorities following a devastating explosion at a Gaza hospital. President Joe Biden’s arrival in Israel today did little to quell the turmoil, with a planned summit of Arab leaders in Jordan being called off after the blast. Biden’s insinuation of fault on the “other team” cast a shadow over diplomatic resolutions, underscoring the peril of an expansive regional conflict.
In the energy sector, oil prices saw an uptick of more than 1%. This surge was partly fueled by Iran’s foreign minister advocating an embargo against Israel, pushing crude oil futures up to $88 a barrel and Brent crude to $91 a barrel.
West Texas Intermediate crude also experienced a sharp rise, nearing $90 a barrel, though it later receded slightly. The call for a comprehensive boycott of Israel by Muslim nations, including an oil embargo, marks a significant escalation in the ongoing conflict between Israel and Hamas. Despite Israel’s relatively minor oil imports in the global context, and its limited reliance on Middle Eastern oil, the rhetoric has heightened tensions.
This development came on the heels of a catastrophic explosion in a Gaza City hospital, resulting in hundreds of casualties. The incident has thrown a wrench in President Biden’s efforts to prevent the Israel-Hamas conflict from broadening across the region.
Adding to the market’s concerns, US oil stockpiles are dwindling, with inventories at Cushing, Oklahoma, dropping to their lowest since 2014. These supplies are scraping the bottom, approaching levels that barely meet operational requirements.
The global oil market is reeling from the crisis in the Middle East. Iran, a staunch supporter of Hamas and a crucial oil supplier, had previously sounded alarms about potential escalation. However, any immediate impact on oil prices is being tempered by available spare production capacity and worries over global economic slowdown dampening demand.
“Traders are on high alert for any ripple effects of the conflict that could significantly disrupt supply,” noted Richard Bronze from Energy Aspects. He highlighted that while Israel primarily sources its oil outside the Middle East and North Africa, the call for an embargo is stoking fears reminiscent of the oil crises in the 1970s, even if the current impact remains largely symbolic.
Israel has options to circumvent potential embargoes, thanks to the global oil market’s reach. Much of its oil comes from Kazakhstan and Azerbaijan, both predominantly Muslim countries, as well as from producers in West Africa.
The origin of the hospital explosion in Gaza is disputed, with local authorities attributing it to an Israeli airstrike, while Israel blames a botched missile launch by Hamas. President Biden appeared to absolve the Israeli military of responsibility.
“The situation was already precarious enough to warrant an unscheduled presidential visit,” observed Paul Horsnell of Standard Chartered. “Once you hit a certain threshold of risk, it’s difficult to calibrate any further escalation.”
Investors now juggle another inflationary element with climbing fuel prices as they speculate on the Federal Reserve’s forthcoming decisions on interest rates. This speculation comes against the backdrop of robust retail sales, hinting at another possible rate hike this year.
Post-market, all eyes will be on the tech sector, with Tesla and Netflix’s earnings expected to shed light on the effects of persistently high interest rates.
Additionally, Nvidia and other semiconductor stocks faced pressure after the US government clamped down on exports of AI chip technology to China, although the new regulations might contain some leeway.
Overall, it was a rough morning for bulls as the market is now leaning toward a bearish continuation lower. But, until stocks start selling off again precipitously, the potential for another rebound remains higher than a breakout past the recent lows. That keeps bulls in control (for now, at least) despite today’s bearish action.
