(March 3): Oil surged as the Iran war threatened to snarl shipping lanes, stoking inflation fears that pummeled bonds amid diminishing odds for a rate cut. The dollar rose. Stocks erased losses.
Also weighing on Treasuries were figures showing manufacturing expanded, with input prices jumping. Ten-year yields saw their biggest advance since October. The S&P 500 was little changed after a slide that earlier topped 1%. Energy and defense shares gained. Several tech firms with solid balance sheets rallied. Airlines sank. Gold topped US$5,300.
The near halt to traffic through the Strait of Hormuz and disruption at a big refinery in Saudi Arabia underscored the threat to oil supplies. West Texas Intermediate jumped 6.3% to settle at US$71.23. European natural gas prices soared as Qatar shut the world’s largest LNG export plant.
For now, the global economy appears capable of absorbing a moderate, temporary rise in energy prices, but fragilities remain, according to Seema Shah at Principal Asset Management.
“A sustained rise in oil prices would place renewed pressure on consumers while potentially delaying anticipated rate cuts,” she said.
As US-Israeli strikes on Iran reverberated across the Middle East, President Donald Trump called on the nation’s leaders to capitulate, while the Islamic Republic’s security chief ruled out negotiations.
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Secretary of State Marco Rubio said the military would step up its attacks while reiterating Trump’s claim that Iran posed an “imminent threat” to the US. Meantime, Defense Secretary Pete Hegseth rejected the idea of an “endless” war.
The recovery in major equity indexes from session lows suggests that, for now, the market views the conflict as a relevant geopolitical risk, but one that remains financially contained in the immediate term, according to Antonio Di Giacomo at XS.com.
The yield on 10-year Treasuries climbed 10 basis points to 4.03%. Traders are now fully pricing in a first Federal Reserve rate cut for September, with bets on a third reduction in 2026 almost evaporating. The dollar rose 0.7%.
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“We believe the market has already been pricing in the possibility of a conflict for a month, which may limit the size of a further move and may cause a quicker rebound when the market sees a likely path to resolution,” said Ryan Detrick at Carson Group.
Morgan Stanley strategists led by Mike Wilson see the conflict in the Middle East as unlikely to derail their bullish view on US stocks, barring a sharp and sustained surge in oil.
“In the end, the Iran military action should remove major uncertainty in the world, and the stock market is expected to have a relief rally as new, pro-Western leadership in Iran emerges and crude oil exports resume,” said veteran strategist Louis Navellier.
The current geopolitical escalation should ultimately be a buying opportunity in stocks as fundamentals remain positive, according to JPMorgan Chase & Co strategists led by Mislav Matejka.
Meantime, Lori Calvasina says investors should be careful about paying too much attention to studies that suggest always buying stocks after geopolitical conflicts.
The RBC Capital Markets strategist warns that evidence for rebounds doesn’t always reflect the risks around wider wars.
Uploaded by Isabelle Francis
