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Oil prices rose above $90 a barrel and US stocks fell as rising tensions in the Middle East sent tremors through the markets.
Brent crude futures rose 1.5 percent on Thursday to settle at $90.65 a barrel – the highest closing price since October – as traders assessed the possibility of a violent response from Iran after a suspected Israeli attack on its consulate in Damascus.
The Standard & Poor's 500 index of blue-chip stocks on Wall Street closed down 1.2 percent, its biggest daily decline since mid-February, while the Nasdaq Composite index, which is dominated by technology stocks, fell 1.4 percent.
Fears that the war between Israel and Hamas could turn into a broader conflagration have simultaneously sparked a rush into assets considered less risky than stocks, according to Steve Englander, head of macro strategy at Standard Chartered Bank in New York.
“It's a classic rush into safe haven assets,” he said, noting that US Treasury bond prices, widely considered risk-free, rose as stocks were sold off.
“Even the Japanese yen is doing well, and it takes a lot for the yen to do well these days,” Englander added, referring to the country's under pressure currency.
Peter Chair, head of macro strategy at the Academy of Securities, echoed his thoughts. “There was a flight to safety after the headlines about the escalation in the Middle East. The price of crude oil rose and investors rushed into Treasury bonds.
The stock market decline coincided with a speech by Neel Kashkari, head of the Federal Reserve Bank of Minneapolis, who indicated that US interest rates may not fall as widely expected this year. If US inflation continues to move “sideways, it would make me question whether we need to do these interest rate cuts at all,” he said.
But analysts were unsure what impact Kashkari's comments would have on the market given that he does not have a vote on the Federal Reserve's interest rate policy committee this year. The US dollar index, which tends to move with interest rate expectations, was unchanged on the day.
“[Kashkari’s] “The comments will not lead to a rally in bonds,” said Subdra Rajappa, head of US interest rates strategy at Société Générale, adding that Thursday’s moves were “more about geopolitical tensions and caution ahead of tomorrow’s US jobs report.”
Oil prices beat analysts' average forecast of $83 per barrel for the quarter, according to Bloomberg data, with global oil demand growing as the OPEC+ alliance led by Saudi Arabia restricts supply.
“We believe the recent increase in prices was driven by renewed geopolitical tensions in the Middle East, but fundamentals such as better-than-expected demand and lower oil production also helped,” said Giovanni Stanovo, commodities analyst at Swiss bank UBS.
High oil prices complicate efforts by central banks to limit rising prices. This comes a day after Federal Reserve Chairman Jay Powell said that the bank's battle with inflation “is not over yet.”
“Rising energy prices may become a concern for financial markets if it leads to further delays in the start of interest rate cuts by major central banks,” Stonovo said.
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The US Department of Energy said on Wednesday that it had canceled its latest oil purchase plan to refill the country's emergency stockpile of crude oil amid rising prices. The Strategic Petroleum Reserve has been drawn down in recent years to make up for shortfalls caused by Russia's large-scale invasion of Ukraine.
The rise in crude prices has contributed to an increase in gasoline prices ahead of the summer driving season, which begins next month. This rise has become a growing concern in the White House as the presidential election approaches in November. Washington recently warned Ukraine against calling off strikes on Russian oil refineries over concerns they could lead to higher oil prices.
