Stocks Get Hit as War Jitters Fuel Rush to Bonds: Markets Wrap

April 12, 2024

6 minutes read

(Bloomberg) — The global financial world was roiled by a flare-up in geopolitical risks that sent stocks sliding — while spurring a flight to the safest corners of the market such as bonds and the dollar. Oil rallied.

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Equities pushed toward their worst day since January on a news report that Israel was bracing for an unprecedented attack by Iran on government targets. Approximately 40 launches were identified crossing from Lebanese territory, some of which were intercepted, the Israel Defense Forces said in a post on X around 1:40 p.m. New York time. Separately, senior US officials said China is providing Russia with drone and missile components. Treasuries climbed and the greenback hit the highest in 2024.

Wall Street’s “fear gauge” — the VIX — spiked to levels last seen in October.

To Matt Maley at Miller Tabak, investors have been much too complacent about geopolitical issues.

“Since gold and oil markets have been pricing in a meaningful impact on the marketplace from this crisis, it’s not out of the question that the stock market will follow those other markets and see an outsized reaction before long,” Maley noted.

The S&P 500 fell about 1.5%. Nearly 95% of its shares retreated, with banks and chipmakers leading losses. A gauge of small caps slid over 2%. Treasury 10-year yields sank nine basis points to 4.5%. Andrew Brenner at NatAlliance Securities also cited “massive short covering” and rate locking amid an expected flurry of debt issuance by banks after earnings.

The dollar headed toward its best week since September 2022. Oil jumped to the highest since October. Haven currencies like the Japanese yen and the Swiss franc outperformed. Gold broke the $2,400-an-ounce mark before erasing gains.

As Iran Threatens Attack, These Are Israel’s Defenses: QuickTake

“Risk was off the menu on Friday,” said Fawad Razaqzada at City Index and Forex.com. “Investors were lighting up on risk exposure ahead of the weekend, fearing risk assets could gap lower should something happen.”

A direct confrontation between Israel and Iran would mean a significant escalation of the Middle East conflict and would lead to a significant rise in oil prices, according to Commerzbank analysts including Carsten Fritsch.

Escalating geopolitical tensions — most recently in the Middle East but also including attacks on Russian energy infrastructure by Ukraine — have spurred bullish activity in the oil options market. There’s been elevated buying of call options — which profit when prices rise — in recent days, as implied volatility climbs.

Jose Torres at Interactive Brokers says the latest developments illustrate how investor sentiment and high equity valuations are vulnerable to geopolitical conflicts, persistent inflation and oil prices.

“Investors have pushed back their expectations for the start of the Fed’s easing cycle — with geopolitics possibly replacing the Fed as one of the market’s top volatility influencers,” he noted.

Meantime, big banks’ results offered the latest window into how the US economy is faring amid an interest-rate trajectory muddied by persistent inflation.

JPMorgan Chase & Co. and Wells Fargo & Co. both reported net interest income — the earnings they generate from lending — that missed estimates amid increasing funding costs. Citigroup Inc.’s profit topped forecasts as corporations tapped markets for financing and consumers leaned on credit cards — signs that a prolonged period of elevated interest rates will benefit large lenders.

“Many economic indicators continue to be favorable. However, looking ahead, we remain alert to a number of significant uncertain forces,” JPMorgan’s Chief Executive Officer Jamie Dimon said. He cited the wars, growing geopolitical tensions, persistent inflationary pressures and the effects of quantitative tightening.

Treasuries rallied sharply, following the market’s worst two days since February, in which yields reached year-to-date highs after inflation readings savaged expectations for Federal Reserve interest-rate cuts this year. Two-year yields — which briefly topped 5% this week — plunged on Friday.

And the latest economic data did little to alter the reduced risk appetite — with consumer sentiment down as inflation expectations rose.

BlackRock Inc. Chief Executive Officer Larry Fink said he expects the Fed to cut rates twice at the most this year, and that it will be difficult for the central bank to curb inflation.

Fink told CNBC he would “call it a day and a win” if the inflation rate gets to between 2.8% and 3%, which is above the Fed’s 2% target.

Meantime, Pacific Investment Management Co. warned that the Fed could pivot back toward interest rate hikes if US inflation moves higher — with the asset manager preferring to buy bonds in other markets.

“If inflation starts to re-emerge then there’s a possibility that the Fed hikes instead of delivering any cuts,” Mohit Mittal, chief investment officer for core strategies at Pimco, said in an interview on Bloomberg Television.

Fed Bank of Boston President Susan Collins reiterated she sees no urgency to cut rates in the near term, given elevated inflation and the resilience of the labor market. Her Chicago counterpart Austan Goolsbee repeated that housing inflation will need to come down in order for overall prices to cool to the central bank’s target. Kansas City Fed President Jeffrey Schmid said officials should wait for “clear and convincing” evidence that inflation is headed back toward 2%.

While shifting expectations around the timing and pace of the first cuts are likely to create further yield volatility in the near term, UBS’s Chief Investment Office thinks the more important point is that the US central bank remains set to start easing this year.

With a low probability of the Fed needing to hike rates further, CIO maintains their positive outlook on quality bonds.

“We continue to favor quality bonds in our global portfolios and recommend investors lock in attractive yields before rates fall this year,” said Solita Marcelli at UBS Global Wealth Management. “We like those with 1–10-year duration, as well as sustainable bonds. We also think investors should consider an active exposure to fixed income to improve diversification.”

Equity markets had remained fairly resilient in recent weeks despite a hawkish turn from Fed officials. Bond markets are now pricing two rate cuts by the end of the year, compared with six just three months ago, yet both the S&P 500 and the Nasdaq 100 are still hovering near record highs.

A rare rally in both tech stocks and commodities, combined with a jump in bond yields, has echoes of periods when bubbles are forming, according to strategists at Bank of America Corp. led by Michael Hartnett.

“If tech stocks lose their ‘flight to safety’ status, we’re going to see a big pickup in volatility,” said Maley at Miller Tabak.

To David Lefkowitz at UBS Global Wealth Management, growth is starting to broaden out — with non-Magnificent Seven stocks poised to generate positive, albeit modest, growth for the first time since the fourth quarter of 2022. This trend should accelerate over the balance of the year, he noted.

“Overall, this leaves us at a neutral stance on US equities, which means that investors should have a full allocation, in line with their long term ‘normal’ allocation to US stocks,” he added. “Our S&P 500 price targets for June and December are 5,100 and 5,200, respectively.”

“In our upside scenario, we think the S&P 500 could reach 5,500 by the end of the year. That outcome would likely be achieved if inflation pressures ease more quickly or corporate profit growth is stronger than expectations,” he concluded.

Corporate Highlights:

United States Steel Corp. shareholders voted in favor of a $14.1 billion takeover offer by Nippon Steel Corp., leaving the fate of the deal for the iconic American steelmaker to the realm of US regulators and politics.
BlackRock Inc.’s long-term investment funds took in $76 billion of net inflows in the first quarter, helping to push the world’s largest money manager to a record $10.5 trillion of client assets.
State Street Corp. reported adjusted earnings per share and net interest income for the first quarter that beat the average analyst estimate.
Global Life Inc. issued a statement on a short-seller report, saying it “reviewed the report and found it to be wildly misleading.”
Exxon Mobil Corp. formally approved its sixth Guyanese oil development that will make the Latin American nation a bigger crude producer than OPEC member Venezuela.
Beijing has ordered telecom carriers like China Mobile Ltd. to replace foreign chips in their core networks by 2027, the Wall Street Journal reported, citing people familiar with the matter.
Activist investor Barington Capital Group L.P. is calling on Paramount Global to end exclusive talks with media mogul David Ellison and consider rival proposals, including one from Apollo Global Management Inc.

Some of the main moves in markets:

Stocks

The S&P 500 fell 1.6% as of 2:48 p.m. New York time
The Nasdaq 100 fell 1.9%
The Dow Jones Industrial Average fell 1.4%
The MSCI World index fell 1.3%

Currencies

The Bloomberg Dollar Spot Index rose 0.7%
The euro fell 0.8% to $1.0641
The British pound fell 0.8% to $1.2449
The Japanese yen was little changed at 153.19 per dollar

Cryptocurrencies

Bonds

The yield on 10-year Treasuries declined nine basis points to 4.50%
Germany’s 10-year yield declined 10 basis points to 2.36%
Britain’s 10-year yield declined six basis points to 4.14%

Commodities

West Texas Intermediate crude rose 0.4% to $85.37 a barrel
Spot gold fell 1.5% to $2,337.77 an ounce

This story was produced with the assistance of Bloomberg Automation.

–With assistance from Alex Longley, Jack Wittels, Jack Ryan, Sybilla Gross, Michael Mackenzie, Michael Msika, Carter Johnson, Isabelle Lee and Caleb Mutua.