Brent crude touched $115 a barrel on Monday amid new threats from President Trump that the U.S. could destroy Iranian infrastructure, including power plants and oil wells, if the Strait of Hormuz isn’t reopened.
Brent crude, the international benchmark, rose to $115 a barrel on Monday before retreating to $114.30, according to data from Oilprice.com and FactSet. West Texas Intermediate, the U.S. benchmark, rose 5% to $105.
U.S. stocks swung on Monday, with major indices resuming a five-week losing streak after first gaining in morning trading. The Dow Jones Industrial Average on Friday entered correction territory amid concerns about the economic impact of the Iran war, which some economists say could heighten the risk of a U.S. recession this year.
The S&P 500 slipped 0.4% and deepened its loss since the war began to pull 9.1% below its record set early this year. The Dow Jones Industrial Average added 49 points, or 0.1%, and the Nasdaq composite fell 0.7%.
“Stocks continue to fight an uphill battle against oil prices and political uncertainty,” said Chris Larkin, managing director of trading and investing at E*TRADE from Morgan Stanley, in an email. “History shows most geopolitical shocks tend to have a relatively short-lived impact on the market, but without clear evidence of an endgame for the Iran war, stocks will find it difficult to see past the current volatility and sustain upside momentum.”
Looking for bargains
The mixed movements followed a whirlwind of action in the war over the weekend, including an entry into the fighting by Houthi rebels in Yemen. None of it gave any clarity for the main questions weighing on financial markets: When will oil and natural gas resume their full flows from the Persian Gulf to customers worldwide, and will it be soon enough to prevent a brutal blast of inflation?
Still, some investors are looking for bargains and signs that the downturn may be close to a bottom.
Taking into account how much profits are expected to grow in the coming year for companies in the S&P 500, the index looks 17% cheaper than before the war, by one measure. That’s in a similar range as prior scares for the market that didn’t result in a recession or the Federal Reserve hiking interest rates, according to strategists at Morgan Stanley.
That’s one of the signs that the strategists led by Michael Wilson point to as “growing evidence the S&P 500 correction is getting closer to its ending stages.”
Inflationary risks
Some economists say there’s an increasing risk that the Federal Reserve will keep interest rates steady — or even hike the benchmark rate— if it decides oil prices are so high that it needs to increase the cost of borrowing to keep inflation under control. Higher interest rates would help keep a lid on inflation, but they would also slow the economy and push down on prices for all kinds of investments.
Treasury yields have been leaping in the bond market since the war began because of such worries, but they eased somewhat on Monday.
The yield on the 10-year Treasury fell to 4.35% from 4.44% late Friday. That’s a significant move for the bond market and offers some breathing room for Wall Street.
