United States
Wall Street closed sharply lower on Friday as tensions in the Middle East escalated, with Iran responding to Israeli strikes by launching drone attacks on Israel. These developments caused oil prices to surge, closing the day up over 7%, while gold also saw gains. The rising geopolitical tensions overshadowed improvements in the University of Michigan’s confidence indicators, which showed the first improvement in six months. Notably, inflation expectations among respondents dropped significantly, with the one-year inflation forecast now at 5.1%, down from last month’s reading of 6.6%.
At the close of trading, the S&P 500 had dropped 1.13%, falling 68 points to 5,976. All sectors of the index were lower, except for energy, which gained 1.72%. The worst-performing sector was financials. Other major indices fared worse, with the Dow falling 1.79% to 42,197 and the Nasdaq Composite dropping 1.30%, losing 255 points to settle at 19,406.
Energy shares surged on the higher oil prices, with Halliburton up 5.51% and ExxonMobil gaining 2.18%. Defence stocks also saw gains due to the ongoing conflict, with Lockheed Martin rising 3.66% and Northrop Grumman advancing 3.94%.
In contrast, financial stocks were lower, led by payment companies like Visa and Mastercard, which fell 4.99% and 4.62%, respectively, following a report in the Wall Street Journal that Walmart and Amazon are investigating issuing their own stablecoins to facilitate transactions. This could disrupt the traditional payments system. While Walmart and Amazon outperformed the broader market, both stocks only saw modest declines of around 0.5%. Major retail banks also suffered sharp losses, with Citigroup dropping 2.39% and Wells Fargo down 2.23%. Travel firms and airlines also faced declines on expectations of higher fuel costs and reduced international travel due to global conflicts.
US bond yields ended the day higher, with the 10-year yield advancing 4 basis points to 4.40%. However, yields were lower for the week after robust demand was seen in government bond auctions. The US dollar saw a modest gain, rising 0.20% on the Bloomberg Dollar Index.
Looking ahead, the week will be dominated by the ongoing conflict in the Middle East and any market response to widespread protests in the US. Additionally, the Federal Reserve’s interest rate decision on Wednesday will be closely watched. Most economists expect no change in rates at this meeting. However, with improving inflation data set against geopolitical concerns, the Fed’s outlook on future rate hikes will be keenly anticipated.
Europe
European shares followed the global trend and closed lower on Friday, reacting to the escalating tensions in the Middle East. The Euro Stoxx 600 fell 0.89%, closing at 544.94, with all sectors except energy seeing declines. The FTSE 100 also dropped by 0.39%, ending the day at 8,850. The UK index benefitted from its exposure to energy stocks, with Shell and BP both advancing.
The themes in Europe mirrored those in the US, with travel companies underperforming while defence stocks advanced. For example, cruise operator Carnival Corporation dropped 3.37%, and airline stocks also declined as airspace over the Middle East was cleared. Lufthansa fell 2.77%, and International Consolidated Airlines Group (IAG), the owner of British Airways, dropped 3.68%.
In economic data, wholesale prices in Germany rose 0.4%, slowing from a 0.8% increase in April, with a notable decline in agricultural product prices. Additionally, European Central Bank (ECB) President Christine Lagarde stated over the weekend that the 2% inflation target is within reach.
This week, the Bank of England is expected to announce its interest rate decision on Thursday, with most analysts predicting that rates will remain unchanged.
Bond yields in Europe were higher, with the 10-year German bond yield adding 6 basis points to 2.53%, and the 10-year UK bond yield rising 7 basis points to 4.55%. The EUR/USD traded at 1.1549, posting a slight loss on the day but strengthening by 1.33% over the week.
Australia
Australian shares declined on Friday after Israel launched attacks on Iran, prompting a surge in oil and gold prices. The ASX retreated from earlier gains, closing down 17 points, or 0.21%, at 8,547.40. Eight of the eleven sectors ended in the red, led by a 1.22% fall in the technology sector. The strongest gains were seen in energy and utilities.
Oil prices soared as much as 12% on the initial news of the attacks before settling with a 6.5% gain by the close of trade in Sydney. This spike in oil prices drove strong interest in energy stocks, with the sector jumping 4.70%. Woodside Energy surged 7.41% to $25.21, adding $1.74. Woodside also announced an extension to its consultative process with the Australian government regarding environmental conditions tied to the expansion of its Northwest Shelf LNG project. The company described the extension as an opportunity for further “constructive consultation” on issues including cultural heritage and air quality. Santos gained 3.73%, while mid-cap Karoon Energy outperformed with a 10.89% rise to $1.985.
In contrast, bulk miners in the materials sector traded lower. BHP fell 2.61% and Rio Tinto slipped 1.12%. However, gold miners benefited from a flight to safety, with gold prices climbing sharply. Northern Star Resources rose 5.13% and Evolution Mining added 5.50%.
Utilities also outperformed, with the sector gaining 4.23%, led by Origin Energy, which advanced 6.22% to $11.45 — its highest close since 2015 — buoyed by analyst upgrades.
Among the notable declines, Qantas dropped 4.94% to $10.19, reversing gains made earlier in the week. Wisetech fell 2.42% to $105.39 as technology stocks sold off in line with weaker US index futures.
In other news Amazon announced over the weekend its intention to invest A$20billion to expand, operate and maintain its data centre infrastructure in Australia. The company is also investing in solar farms in Victoria and Queensland.
Bond yields fell as investors sought safe-haven assets. The Australian 10-year bond yield declined by 8 basis points to 4.15%, while the 2-year yield dropped 10 basis points to 3.26%.
Australian futures markets, which closed on Saturday morning, were down 0.23%, or 20 points. Declines in US futures indexes on Friday where the S&P was down 1.5% were already factored into Australian prices. The Australian dollar also fell and is now trading at 0.6487 against the US dollar.
Commodities
Oil prices surged on Friday following reports of an Israeli attack on Iran, initially spiking as much as 12% before closing with a 7% gain. West Texas Intermediate (WTI) crude rose by US$4.94, or 7.26%, to settle at US$72.98, while Brent crude jumped 7.02% to close at US$74.23. The sharp gains were fuelled by growing concerns over potential disruptions to oil exports through the Strait of Hormuz, a critical passage that handles around 20% of the world’s oil supply. Iran, which produces approximately 3.3 million barrels of oil per day and exports about 2 million barrels, warned that it might consider closing the strait in response to escalating tensions.
Over the weekend, Israeli strikes targeted Iranian oil and gas infrastructure, as both sides continued their attacks. Additionally, Iran cancelled its ongoing nuclear negotiations with the United States. Meanwhile, options markets reflected heightened geopolitical risk, with a notable spike in US$80 call volumes on WTI crude as traders positioned for the possibility of further escalation.
Copper prices in London fell, with the LME contract dropping 0.46% (US$57) to close at US$9,645 per tonne. Trade talks between China and the US took a backseat as traders focused on the ongoing geopolitical tensions. Meanwhile, iron ore futures settled at US$94.00 in New York on Saturday, unchanged from the previous 24 hours, although the market traded within a volatile US$2 range.
Gold saw a boost from safe-haven buying, rising 1.37% (+US$46) to close at US$3,432. Over the week, gold advanced 3.6%. Silver remained steady at US$36.30, near its recent highs. Bitcoin also showed stability, finishing the weekend at US$105,019, down 0.90% from Thursday’s close.
Economic Calendar
China:
- Industrial Production (May) – 12:00pm
- Retail Sales (May) – 12:00pm
US:
- NY Empire State Manufacturing Index (Jun) – 10:30pm
This article was written by Paul Darwell, Rivkin Securities Pty Ltd. Enquiries can be made via [email protected] or by phoning +612 8302 3632.
