On Friday, the U.S. stock markets experienced significant declines, with the S&P 500 Index falling by 1.13%, the Dow Jones Industrial Average dropping 1.79%, and the Nasdaq 100 witnessing a 1.29% decrease. This downward movement coincided with escalating geopolitical tensions following Israel’s military strikes on Iranian targets, which have raised concerns over a potential conflict that may disrupt global economic stability.
Late Thursday, Israel initiated a series of military attacks directed at Iran’s nuclear and ballistic missile programs, targeting approximately 100 locations. The Israeli government stated these strikes were a response to perceived threats from Iran, particularly following the discovery of a renewed focus on advancing its military capabilities. Among those killed in the attacks were high-ranking Iranian military figures and nuclear scientists, further complicating an already fraught regional situation.
The conflict intensified markedly on Friday when Iran retaliated by launching a barrage of ballistic missiles at Israel, signaling a potential escalation in hostilities. Israeli Prime Minister Benjamin Netanyahu affirmed that military operations against Iran would persist “for as many days as it takes to remove this threat,” while former U.S. President Donald Trump suggested that urgent nuclear negotiations between Iran and the U.S. could mitigate further violence. However, the upcoming nuclear talks scheduled for this Sunday remain shrouded in uncertainty.
The Trump administration distanced itself from Israel’s strikes, asserting that the U.S. was not directly involved. Nevertheless, the situation poses a risk of U.S. entanglement in the Israeli-Iranian conflict, especially if Iran were to disrupt the vital Strait of Hormuz, a critical route for global oil shipments. Analysts warn that U.S. military engagement might be inevitable if Iran escalates its attacks on Israeli civilians or U.S. assets in the region.
The financial markets reacted swiftly to these developments, with oil prices surging by 7% following the military actions. The substantial increase in oil prices could have far-reaching implications for the global economy, stoking fears of inflation and potential supply disruptions. Gold prices also rose, reflecting a general risk-off sentiment among investors, while cryptocurrencies such as Bitcoin dipped by 0.9%.
Investor anxiety heightened as market participants prepared for a pivotal G-7 meeting in a scenic Canadian resort town. The gathering, which has drawn significant attention due to President Trump’s potential announcement of new tariffs, is anticipated to influence global trade relations markedly in the coming weeks. The president hinted earlier this week that he would send letters to several trading partners regarding unilateral tariffs before a key deadline in early July, thus amplifying investor concerns over escalating trade tensions.
In a somewhat contrasting development in trade relations, UK Prime Minister Keir Starmer announced that all hurdles to finalizing a U.S.-UK trade deal have been cleared, suggesting an agreement may be reached imminently. This news provided a flicker of optimism amid the prevailing uncertainty in global trade dynamics.
Despite geopolitical turmoil, there were positive indicators within the U.S. economy. The preliminary June reading of the University of Michigan’s consumer sentiment index revealed an impressive increase of 8.3 points, rising to 60.5, considerably above market expectations of 53.6. Additionally, inflation expectations observed a notable decline. One-year inflation expectations decreased to 5.1% from the previous 6.6%, outpacing the anticipated drop. Simultaneously, the five-to-ten-year inflation expectations remained stable, only slightly dipping to 4.1% from 4.2%.
The financial markets are currently pricing in a mere 3% chance of a 25-basis-point rate cut at the next Federal Open Market Committee meeting scheduled for June 17-18, reflecting a cautious outlook among investors regarding future monetary policy changes.
Internationally, stock markets mirrored the U.S. trends on Friday, with major European indexes like the Euro Stoxx 50, the Shanghai Composite in China, and Japan’s Nikkei Stock 225 all closing lower. The challenges facing the global economy contributed to this bearish sentiment.
In the realm of fixed income, the latest trading session saw September 10-year Treasury notes drop by 14.5 ticks, causing yields to rise. The yield on 10-year Treasury notes increased by 5.1 basis points, reaching 4.411%. The bond market reacted to inflationary concerns driven by the sharp rise in oil prices. Conversely, European government bond yields also rose, with the 10-year German bund yield climbing by 5.8 basis points, and the 10-year UK gilt yield increasing by 7.3 basis points.
The turmoil surrounding the Israeli-Iranian conflict bolstered certain sectors in the stock market. Defense and oil companies gained ground, with ExxonMobil and Chevron seeing increases of 2.1% and 0.7%, respectively. Defense contractors such as Lockheed Martin and Northrop Grumman also benefited from heightened military spending, recording gains of 3.7% and 4.0%.
However, travel-related stocks faced significant headwinds, as ongoing uncertainty in the Middle East led to concerns over tourism and travel. Major corporations in this sector, including Booking Holdings, Expedia Group, Hilton, and Marriott, posted average losses of nearly 3%. Airline shares were also affected, as rising oil prices portend increased fuel costs, which could weigh heavily on profit margins. American Airlines, for example, saw a decline of more than 4%.
The so-called “Magnificent Seven” stocks, despite their prominence in the tech sector, closed lower on Friday due to a broadly negative market atmosphere, with the exception of Tesla, which managed a modest gain. Notably, Nvidia experienced a decrease of 2.1%, while both Apple and Meta Platforms saw losses exceeding 1%. Meanwhile, reports emerged that major retailers like Amazon and Walmart were exploring avenues to utilize stablecoins, resulting in shares of Visa and Mastercard dropping by over 4%.
Additional notable declines were reported from Boeing, following a devastating crash of a 787 Dreamliner in India that resulted in the tragic loss of more than 240 lives. Boeing shares fell nearly 2%, compounding a steep decline of over 5% from Thursday.
The economic landscape remains volatile, driven by intricate geopolitical tensions and shifting financial conditions. As investors brace for potential outcomes from the G-7 meeting and continued military actions in the Middle East, the ramifications of these developments are likely to resonate across global markets in the days and weeks to come.
As this situation evolves, market participants will be keeping a vigilant eye on both geopolitical developments and domestic economic indicators, weighing the benefits of potential trade agreements against the backdrop of conflict and uncertainty. The convergence of these issues continues to underscore the fragility of global markets in these tumultuous times.