Stocks fell sharply on Thursday as an intensifying conflict in the Middle East pushed oil prices higher and produced a jump in sovereign bond yields. The market reaction reflected investor anxiety over possible disruptions to energy supplies and the knock-on effects on inflation and economic momentum.
In commentary accompanying market moves, the note of the day reminded readers that, even in times of geopolitical uncertainty, core economic data remain influential. The U.S. non-farm payrolls report for February, due at 8:30 a.m. Eastern Time on Friday, and any indications of AI-related labour disruptions, are expected to divert attention away from the Middle East for a spell.
Market snapshot
- Stocks: Asia staged a solid rebound led by Japan and South Korea - Japan +2%, South Korea +10% - but markets in Europe and the Americas turned lower. The Nasdaq was down only 0.3% while the Russell 2000 lost 2%. In Latin America, Brazil slid 2.5% and Mexico fell 3%.
- Sectors and shares: Eight S&P 500 sectors declined and three rose. Industrials, consumer staples, healthcare and materials each fell by 2% or more. Notable movers included Caterpillar and Goldman Sachs, both off about 3.5%, while IBM gained 2.5%.
- FX: The dollar strengthened broadly, with emerging market currencies hardest hit. The South African rand (ZAR) and the Chilean peso (CLP) each declined by roughly 2%. Among G10 currencies, the Australian dollar was the weakest, down 1%.
- Bonds: U.S. yields rose by as much as 6 basis points and the yield curve steepened a touch. U.K. yields climbed 10 basis points on the day and have risen about 30 basis points this week. The two-year German Schatz yield has surged 25 basis points over the week, the largest weekly move in three years.
- Commodities: Oil jumped to its highest levels since July 2024, with Brent up 5% and WTI up 9%. On the week these benchmarks were up between 17% and 20%, their largest weekly rise since February 2022. Gold fell 1.5% as the stronger dollar and rising yields reduced its safe-haven appeal.
Key themes
One clear takeaway from the market action is that investors appear reluctant to treat a supply-driven spike in energy prices as transient. The experience of the 2021-2022 period seems to have shifted expectations about central bank reactions to commodity shocks. Market pricing now reflects only a single Federal Reserve rate cut for the year, not expected until October; another Bank of England cut is not fully priced in; the European Central Bank looks more likely to raise rates than to cut; and the Reserve Bank of Australia could even consider hiking again this month.
Signs that diplomacy might provide a route to de-escalation briefly lifted risk assets on Wednesday. Traders bought into beaten-down equities on hopes that back-channel U.S.-Iran engagement could open a path to peace. That rebound, however, now looks premature as the conflict spreads and becomes more entrenched, sending energy prices and yields noticeably higher. The Nasdaq is roughly flat on the week, raising the question of whether calm in tech reflects justified resilience or complacency.
Economic fundamentals will reassert themselves with Friday's labour market print. A robust payrolls outcome would ease some pressure on central bankers; a softer reading would complicate decisions as yields are climbing amid the energy shock while the yield curve remains the flattest so far this year. The combination of rising inflationary pressure from commodity markets and signs of slowing growth raises the spectre of stagflation for investors weighing policy and asset allocation choices.
Events and data to watch next
- Developments in the Middle East
- Reserve Bank of Australia Deputy Governor Andrew Hauser speaks
- South Korea inflation (February)
- European Central Bank officials to speak: President Christine Lagarde, board members Isabel Schnabel and Piero Cipollone, and Pierre Wunsch
- Euro zone GDP (Q4, revised)
- Germany industrial production (January)
- Canada PMIs (February)
- U.S. non-farm payrolls (February)
- U.S. retail sales (January)
- U.S. Federal Reserve officials scheduled to speak include Governor Stephen Miran, San Francisco Fed President Mary Daly, Philadelphia Fed President Anna Paulson, Boston Fed President Susan Collins, and Cleveland Fed President Beth Hammack
For investors and market participants, the immediate challenge is to balance geopolitically driven risk with incoming economic data. Near-term market direction will likely hinge on whether the supply shock to energy intensifies and on Friday's U.S. labour-market data. Until clearer signs emerge, volatility across oil, fixed income and equity markets may remain elevated.
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