Dow Jones, S&P 500, Nasdaq drop as US strikes Iran, Fed rate-hike bets jump
US stocks opened lower on Monday as tensions between the US and Iran escalated, with the two sides reportedly exchanging fire for the first time in about a month. The development pushed oil prices higher, reviving concerns that rising energy costs could fuel inflation at a time when expectations of another Federal Reserve rate hike are gaining traction.
The Dow Jones Industrial Average fell 0.5% shortly after the opening bell, while the S&P 500 declined 0.4%. The technology-heavy Nasdaq Composite slipped 0.3%. Despite the cautious start to the week, all three major US indices remained on course to finish the month in positive territory.
US stock futures slip
Earlier, US stock futures slipped, as renewed hostilities between the US and Iran pushed oil prices higher and revived concerns over the outlook for inflation and interest rates.
S&P 500 futures were down around 0.3%, while Nasdaq-100 futures fell 0.3%. Dow Jones Industrial Average futures declined 0.2% in early trading. The three major US indexes, however, remain on track to end August with gains.
The moves came after the US and Iran exchanged strikes for the first time in about a month. US Central Command said American forces struck Iranian Islamic Revolutionary Guard Corps forces after they were seen preparing to deploy mines in the Strait of Hormuz.
Iran subsequently launched missile and drone attacks on US bases in Jordan, while the UAE’s military dealt with a drone coming from Iran over its territorial waters.
Oil prices climbed as renewed tensions raised concerns over the security of shipments through the Strait of Hormuz.
Brent crude futures for November delivery were up 3.2% at around $90.91 a barrel, while West Texas Intermediate crude futures for October rose 3.5% to $86.28 a barrel.
Iranian media separately reported that an unidentified supertanker attempting to pass through the southern route in the Strait of Hormuz was hit by two mines. It also reported that Iranian authorities seized a bulk carrier near the port of Bandar Abbas.
Oil prices have had a volatile August, with Brent moving in a range of almost $17 a barrel during the month. Crude prices are up about 50% so far this year.
The Strait of Hormuz remains a key focus for the oil market, with around 6 million to 8 million barrels of crude a day, largely from other Gulf producers, continuing to move through the waterway, according to traders monitoring cargoes.
September Fed rate hike bets rise
Higher oil prices come as markets reassess the outlook for US interest rates following Federal Reserve Chair Kevin Warsh’s comments at Jackson Hole last week.
Warsh said inflation was running too high and that the Federal Reserve still had work to do. He also said financial conditions were not currently restrictive and described interest rates as the Fed’s main tool for achieving its mandate, while stopping short of signalling support for a September rate hike.
Markets have nevertheless increased their expectations for a rate hike at the Fed’s next meeting. Swaps now reflect around a 60% probability of a hike, up from roughly 34% before Warsh’s speech.
The rise in oil prices could further complicate the rate outlook as investors assess its impact on inflation.
US jobs data in focus
With earnings season largely behind investors, attention this week will also turn to the US labour market, with the Labor Department’s monthly jobs report due on Friday.
The report will provide another key data point for markets ahead of the Federal Reserve’s September meeting.
Gold, bitcoin
Elsewhere, spot gold was little changed, while Bitcoin was down 0.4% at around $78,301. Ether fell 1.9% to around $2,444.
In other markets, the US 10-year Treasury yield was little changed at 4.72%, while the dollar spot index declined 0.1%. The Japanese yen weakened beyond 160 per dollar earlier, a level that has previously raised expectations of possible intervention by Japanese authorities.