U.S. stocks were set to open at the lowest levels since November on Monday as global crude prices soared, risk sentiment evaporated, and investors recalibrated their growth and inflation forecasts for major economies around the world amid an escalating war with Iran.
With the U.S. vowing to continue its effort to destroy Iran’s nuclear weapons program and bring about an “unconditional surrender,” and officials in Tehran extending their retaliatory strikes against Persian Gulf states, the 10-day war shows no signs of abating.
Attacks on fuel depots and water desalination plants also has added a new dimension to the conflict, and one that is likely to see hostilities extended well into the spring and possibly summer months.
That has been adding to security and safety concerns in and around the Strait of Hormuz, which handles around a fifth of the world’s energy traffic each day, and adding massive upward pressure to global crude prices.
Oil blasted through $100 a barrel minutes after futures markets opened late Sunday, with Brent crude contracts for May delivery, the global pricing benchmark, reaching an intra-day peak of $119.50 a barrel, the highest in four years.
West Texas Intermediate futures for April delivery, which are tightly linked to U.S. gas prices, surged as much as 29% in early trading but eased to around $101 a barrel following reports that G-7 leaders were mulling the coordinated release of excess crude from their respective stockpiles.
The spillover into broader market sentiment was equally evident. Major stock markets around the world were deeply in the red on Monday, with Japan’s Nikkei 225 slumping 5.2% and Europe’s Stoxx 600 falling to the lowest levels of the year.
Bond markets also were on the move with traders pricing in both the expected impact of faster inflation and the likely damage to global growth prospects.
Benchmark 2-year Treasury note yields, the most sensitive to changes in interest rate forecasts, have risen more than 20 basis points since the conflict began and trading at 3.607%. Traders also were paring bets on Federal Reserve rate cuts, and now see only one quarter-point reduction between now and the end of the year.
“The higher oil prices go, the more the short end of interest rate curves are re-priced higher and the greater pressure builds at the long end of the bond market,” said ING’s global head of markets, Chris Turner.
“A much bigger unwind remains the risk for global equity markets as higher energy prices dampen growth prospects, while higher longer-dated interest rates sap the net present value earnings of the growth stocks,” he added.
The two-sided risks are also stoking market volatility gauges, with the Cboe Group’s VIX index soaring more than 33% from last week’s close to trade at 31.79. At that level, options dealers are expecting daily swings of 1.99%, or 134 points, for the S&P 500 over the coming month.
The benchmark S&P 500 has declined 1.5% for the year and was likely to open near the lowest levels since late November on Monday. That would mark a 4.4% drawdown from the all-time high it reached on Jan. 27.
“A confluence of challenges has been weighing on the U.S. equity market,” said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets.
“Geopolitics generally and the conflict in Iran specifically, an underwhelming reporting season, private credit worries, the rotation out of old and crowded leadership names, and fears over the possibility of looming AI-related job losses,” she said.
“In this context, a 5% to 10% drawdown during the year is our base case. If recession, oil price shock, and/or contagion fears continue to mount, a tier 2 ‘growth scare’ drawdown in the 14% to 20% range is a distinct possibility,” she cautioned.
Write to Martin Baccardax at martin.baccardax@barrons.com