(March 2): Stocks dropped on Monday morning as traders weighed the market risks from an escalating conflict in the Middle East, with oil spiking and President Donald Trump saying the US and Israeli strikes on Iran may last weeks.
The S&P 500 opened 0.7% lower on Monday, led by the consumer discretionary and communication services sectors. The move lower was broad-based with more than three stocks falling for every one that gained. AES Corp was the worst-performing stock in the index on Monday morning after BlackRock’s GIP and EQT bought the company for US$10.7 billion, which Bloomberg Intelligence said was below market expectations.
The tech-heavy Nasdaq 100 Index fell 0.7%, while the blue-chip Dow Jones Industrial Average fell 0.8%.
“We expect this safe-haven mode to be in full force this week,” said David Bahnsen, chief investment officer at Bahnsen Group. He noted energy had been the top-performing of 11 sectors in the S&P 500 Index before the US and Israeli strikes on Iran and “we expect this sector to continue its run, thanks to supply fears, increasing demand and since the sector is still trading at much more attractive valuations than technology.”
The Cboe Volatility Index, known as the fear gauge, climbed and “implied volatilities are up across asset classes following the US/Israeli strikes on Iran over the weekend,” said Mandy Xu, vice-president and head of derivatives markets intelligence at Cboe Bats LLC.
See also: Dollar, bonds rally as traders absorb war impact
A range of sectors saw big moves Monday morning, including sharp drops by airlines and cruise-ship operators — sensitive to fuel prices — and spikes higher by defence names and oil producers. Traditional safe haven assets, including bullion and gold-mining stocks like Newmont Corp, climbed.
“Typically sharp moves on geopolitics are not durable, and while today will likely be messy, we are inclined to think this move is more likely a tactical opportunity to buy than sell on the index level,” said Jonathan Krinsky, chief market technician at BTIG LLC.
Buying opportunity?
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JPMorgan strategists said the war is likely to lead to a risk-off move in the short-term but a buying opportunity in for investors with a three, six or 12-month time frame. Similarly, Morgan Stanley strategists said that oil prices would need to spike to US$100 a barrel to impact the bullish outlook for US equities over the next six to 12 months.
“The level of complacency is very, very high this morning,” said Matt Maley, chief market strategist at Miller Tabak + Co, describing the drop in stocks on Monday as “muted”. He said investors have grown accustomed to seeing “significant quick reversals”.
The top-performing stocks in the market early Monday morning were in the energy sector, including Occidental Petroleum Corp as crude oil prices jumped, with tanker traffic all but halted through the Strait of Hormuz.
Defense Secretary Pete Hegseth said Trump has the “latitude” to change the anticipated time frame of the war in Iran and also denied that it would morph into an endless war.
Traditional safe haven assets, including bullion and gold-mining stocks like Newmont Corp, climbed.
“Geopolitical risk premia across markets had alraedy risen in recent weeks amid a well signaled military buildup,” said Darrell Cronk, chief investment officer for wealth and investment management at Wells Fargo.
Still ahead on Monday, investors will get reports on manufacturing purchasing managers’ prices in what is expected to be a busy week for economic data releases. Vehicle sales data is due on Tuesday, mortgage applications are out on Wednesday and import prices are expected on Thursday ahead of jobs report on Friday.
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