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On Friday, Treasurys, gold, and the U.S. dollar all experienced increases in value, while there was a surge in demand for investments that protect against stock market losses.
News that Israel is preparing for a possible attack from Iran caused investors to seek safer investments on Friday, leading them to sell off stocks and instead invest in Treasury bonds, gold, and the U.S. dollar.
The initial cause of the sell-off was a report in the Wall Street Journal stating that Israel was preparing for a potential Iranian attack expected to occur by the end of the week. This situation was reminiscent of a previous market reaction on April 4, when stocks dropped significantly due to a similar warning from Israel.
According to James St. Aubin, the current situation in Iran adds a new aspect to the main story that is happening right now. He believes that it is the reason for the market activity that is taking place today.
In New York by midday, the S&P 500 was heading towards its largest weekly decline since January, and the Nasdaq Composite had lost the gains it had made earlier in the week when it reached a new all-time high on Thursday.
At the same time, the Dow Jones Industrial Average (DJIA) fell by almost 500 points, putting the blue-chip index on course for its longest period of losses since June and its largest two-week percentage decline since March 2023, as reported by Dow Jones Market Data.
Market strategists attributed the timing of the report to amplifying the decline in stocks that had already started earlier in the week. They clarified that many traders were hesitant to hold onto stocks over the weekend due to concerns about potential repercussions if Iran carried out its threats.
Certainly, the weakness in the stock market this week can be attributed to a variety of factors, including a higher-than-anticipated inflation report and investors’ lukewarm reaction to earnings from major banks.
As stock prices fell, the demand for options to protect against market fluctuations increased significantly. This caused the Vix, also known as the fear gauge on Wall Street, to rise sharply towards its highest level since October 30, based on data from Dow Jones Market. The index had increased by more than 25% in recent trading sessions, heading towards its largest daily gain since November 2021.
The rising Vix briefly caused the price of Vix futures contracts expiring this month to surpass those expiring in May, leading to an inversion of the Vix futures curve for the first time since February, according to Tyler Richey, co-editor of Sevens Report Research.
Richey mentioned that an upward sloping Vix futures curve indicates that traders are preparing for stocks to keep falling in the following weeks.
Investors also found refuge in bonds, causing Treasury yields to decrease. The yield on the 10-year Treasury note fell by 6 basis points to 4.51%. This information is according to FactSet data.
Despite a decrease in Treasury yields, the value of the U.S. dollar continued to rise, as indicated by the ICE U.S. Dollar Index DXY increasing by 0.6% to 105.95. It is set to have its most successful week in 17 months. Analysts attribute this disconnect between the dollar and yields to a safe investment strategy.
The effect was also noticed in commodity markets, with gold futures reaching new record highs. The most active gold contract increased by $35.30, equivalent to 1.5%, reaching $2,407 per ounce. Additionally, U.S.-traded West Texas Intermediate Crude futures rose by 1.5% to $86.23 per barrel, recovering most of the losses from earlier in the week.
Rarely do geopolitical events have such a significant influence on the stock market. Even downturns related to major historical events like the September 11 attacks usually recover within a few months.
Market strategists believe that corporate earnings will remain mostly unaffected by the conflict in the Middle East. However, analysts at BofA Global Research have pointed out various ways in which US multinational companies could be negatively impacted by the conflict.
In a recent report following the attack by Hamas on Israel on October 7th, concerns were raised about potential impacts on global trade and the European economy due to a potential increase in energy prices comparable to those seen after Russia’s invasion of Ukraine.
However, some investors cautioned that the drop in stock prices on Friday may be short-lived, similar to what happened on April 4.
Michael Lebowitz, who manages portfolios at RIA Advisors, suggested that the headlines about a potential attack from Iran were likely a tactic in negotiations. He believed that the recent decline in stock prices on Friday was actually due to the market becoming overvalued after a significant five-month increase in value.
Steve Sosnick, chief market strategist at Interactive Brokers, pointed out in a recent interview with MarketWatch that traders often become overly enthusiastic when geopolitical tensions increase.
Iran is said to be warning of possible revenge against Israel following an Israeli airstrike on an Iranian embassy in Damascus, Syria, which resulted in the deaths of multiple high-ranking Iranian figures.
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