Oil prices a chief market fear after Iran attack on Israel

By Christine Idzelis

When gas prices rise quickly at the pump, 'consumers must cut back on other spending,' says DataTrek's Nicholas Colas

U.S. stocks were attempting a rebound on Monday, after fears over the conflict in the Middle East sparked a flight to safety Friday in U.S. markets.

"The Mideast has been a constantly tumultuous part of the world for decades, but the only time that fact affects capital markets is when the price of crude oil spikes," said Nicholas Colas, co-founder of DataTrek Research, in a note emailed Monday. "This happens when supply suddenly diminishes or markets fear it will."

U.S. oil prices were subsiding Monday, after climbing Friday as investors feared an Iranian attack on Israel. Iran attacked Israel over the weekend, but an international military coalition led by the U.S., Britain and France helped thwart the bombardment of drones and missiles, according to an Associated Press report on April 14.

"Crude prices are our chief concern, but we are a long way" from $125 a barrel - a level of West Texas Intermediate oil that "would almost certainly cause a recession if sustained," said Colas. "Gasoline prices are the transmission mechanism between Mideast conflict and the US economy: when pump prices increase quickly, consumers must cut back on other spending."

West Texas Intermediate (CL.1) (CL00), the U.S. benchmark for crude oil prices, was trading down 1.4% at $84.475 a barrel around midday Monday, according to FactSet data, at last check.

Colas estimated that a spike in oil prices pushing U.S. gasoline to $5.40 a gallon this summer would make a recession later in 2024 "a genuine possibility." U.S. gas prices averaged $3.634 a gallon at the pump on Monday, according to AAA, at last check.

The U.S. stock market was rising around midday Monday, with the Dow Jones Industrial Average DJIA up 0.4%, the S&P 500 SPX gaining 0.3% and the Nasdaq Composite COMP advancing 0.1%, according to FactSet data, at last check. Treasury yields were also climbing on Monday as investors weighed fresh data showing retail sales in the U.S. was stronger in March than Wall Street expected.

Prices of U.S. Treasury bonds had rallied on Friday, sending their yields lower, as investors sought haven assets amid anxiety the conflict in the Middle East risked widening. Bond yields and prices move in opposite directions.

The yield on the 10-year Treasury note BX:TMUBMUSD10Y was surging about 12 basis points around midday Monday to 4.64%, FactSet data show, at last check. That's after seeing on Friday its biggest daily drop since March 5 based on 3 p.m. Eastern Time yields, according to Dow Jones Market Data.

Investors will be watching 10-year Treasury yields this week "because history says they should decline as part of any flight to safety," said Colas. "However, if markets are concerned that rising oil prices will fuel inflation, then yields may actually rise further."

Treasury yields are up this year as concerns over sticky U.S. inflation have prompted traders to push out their expectations for when the Federal Reserve may begin cutting interest rates.

Traders in the bond and currency markets will signal this week how anxious they are about the Middle East, as well as whether U.S. budget deficits are hurting appetite for Treasurys as "safe haven assets," according to DataTrek.

"The dollar always rallies in times of geopolitical crisis because, even with America's outsized budget deficits, it remains the world's safe haven currency," said Colas. "Should geopolitical tensions continue to rise, we will be looking at the value of the dollar versus euro and yen to gauge both the severity of the global capital market's response and when investors' risk aversion peaks."

The ICE U.S. Dollar index DXY- a measure of the greenback against a basket of six major currencies including the euro, yen, British pound, Canadian dollar, Swedish krona and Swiss franc - was about flat in midday trading Monday, according to FactSet data, at last check.

"Global capital markets may need to reset - modestly, in our opinion - because of Iran's attack on Israel this weekend but, past that, we must all wait and see what comes next," said Colas.

Meanwhile, the S&P 500 index remains up 7.7% so far this year based on trading levels around midday Monday. The index is recovering Monday from a sharp 1.5% drop on Friday, which marked its biggest daily percentage decline since the end of January, according to Dow Jones Market Data.

-Christine Idzelis

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

04-15-24 1236ET

Copyright (c) 2024 Dow Jones & Company, Inc.