Escalating conflict in the Middle East is forcing investors to shift funds to safe assets

By JustMarkets

On Friday, the Dow Jones (US30) was down 1.24% (for the week -2.40%), while the S&P 500 (US500) decreased by 1.46% (for the week -1.69%). The NASDAQ Technology Index  (US100) closed Friday negative 1.62% (for the week -0.68%). Stock indices declined sharply on Friday, with the S&P 500 (US500) falling to a 4-week low and the Dow Jones (US30) falling to a 2-month low. Heightened geopolitical tensions heightened risk aversion and triggered the liquidation of long positions in equities on Friday.

Following last week’s alleged Israeli strike on senior Iranian military commanders in a Syrian compound, market participants were spooked as a flurry of reports emerged towards the end of the week that a potential Iranian retaliatory strike on Israel could be “imminent”. These Friday headlines quickly brought geopolitical concerns to the forefront and sparked a bout of risk aversion before the weekend. The Iranian attack did occur on Saturday in the form of drones and rockets launched toward Israel. Israel was able to repel the attack and did not announce an immediate intention to retaliate, while the US has said it wants to avoid a wider war in the Middle East.

Chipmakers were under additional pressure on Friday after it was revealed that the Chinese government has required telecom operators to replace foreign chips in their backbone networks by 2027. As a result, shares of ON Semiconductor (ON) closed down more than 5% and topped the NASDAQ (US100) losers list. Intel (INTC) shares were also down more than 5%, while Advanced Micro Devices (AMD), Micron Technology (MU), NXP Semiconductors NV (NXPI), and Microchip Technology (MCHP) were down more than 4%.

Bank earnings results for the first quarter were mixed on Friday. JPMorgan Chase (JPM) closed down more than 6% after managed net interest income for the first quarter came in below consensus, and full-year net interest income guidance came in below estimates. However, Wells Fargo & Co. (WFC) reported first-quarter earnings above consensus, and Citigroup (C) reported better-than-expected first-quarter FICC sales and trading revenue.

The bitcoin price fell more than 5% to below $64,000 on Sunday, extending Saturday’s 7% drop. Investors moved away from risky assets amid escalating tensions in the Middle East after Iran struck Israel.

Equity markets in Europe traded flat on Friday. The German DAX (DE40) was down 0.13% (for the week -1.28%), the French CAC 40 (FR40) closed down 0.16% (for the week -0.49%), the Spanish IBEX 35 (ES35) was up 0.34% (for the week -1.64%), the British FTSE 100 (UK100) closed positive 0.91% (for the week +1.07%).

ECB officials once again spoke with one voice about a rate cut in June. On Friday, ECB Governing Council representative Stournaras said that the ECB should not be afraid to change its cautious stance on interest rates away from that of the Federal Reserve and “now is the time to diverge”. His colleague, ECB Governing Council spokesman Kazaks, said: “If nothing changes, June will be the month when we see the first-rate cut by the ECB”. ECB Governing Council spokesman Muller said: “Persistently slower overall price growth in the Eurozone raises the likelihood of an ECB rate cut in June”.

WTI crude oil prices hit a six-month high on Friday, but prices fell back to $85 a barrel at the open on Monday as Israel successfully defended itself against a massive Iranian air attack over the weekend. However, oil volatility will remain elevated in the coming days as investors prepare for the Israeli government’s response to the attack. A full-scale war with Iran could further disrupt oil supplies, leading to further gains for the black gold.

Asian markets were predominantly up last week. Japan’s Nikkei 225 (JP225) rose by 0.30%, China’s FTSE China A50 (CHA50) declined 1.86%, Hong Kong’s Hang Seng (HK50) gained 0.43% for the week, and Australia’s ASX 200 (AU200) was positive 0.19%.

Chinese trade news on Friday was weaker than expected, negatively affecting global growth prospects. China’s March exports fell by 7.5% y/y, weaker than expectations of 1.9% y/y and the largest decline in 7 months. Imports in March unexpectedly fell by 1.9% y/y vs. expectations of 1.0% y/y growth. On April 15, the People’s Bank of China (PBOC) kept the rate on CNY100 bln one-year loans to some financial institutions under the medium-term lending facility (MLF) program at 2.5% amid efforts to ensure RMB stability.

S&P 500 (US500) 5,123.41 −75.65 (−1.46%)

Dow Jones (US30) 37,983.24 −475.84 (−1.24%)

DAX (DE40) 17,930.32 −24.16 (−0.13%)

FTSE 100 (UK100) 7,995.58 +71.78 (+0.91%)

USD Index 106.01 +0.73 (+0.69%)

• – Switzerland Producer Price Index (m/m) at 09:30 (GMT+3);
• – Eurozone Industrial Production (m/m) at 12:00 (GMT+3);
• – US Retail Sales (m/m) at 15:30 (GMT+3).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.