Equities Retreat as Escalating US-Iran Tensions Send Crude Oil Futures Higher

Wall Street indices declined Friday as escalating military tensions between the United States and Iran pushed energy markets higher while dampening investor sentiment. The S&P 500 Index ($SPX) slipped 0.14%, the Dow Jones Industrial Average ($DOWI) dropped 0.27%, and the Nasdaq 100 Index ($IUXX) fell 0.34%. Corresponding June E-mini futures showed similar declines, with ESM26 down 0.17% and NQM26 down 0.38%.

The market pullback came after U.S. forces conducted strikes against Iranian military installations for the second time this week, while Kuwait responded to reported missile and drone threats from Iran. Crude oil futures surged more than 2% following the attacks, as energy markets reacted to heightened geopolitical risks in the Persian Gulf region.

Despite the early weakness, equity futures recovered from session lows after a batch of Federal Reserve-friendly economic data reinforced expectations for a more cautious monetary policy approach. The April core personal consumption expenditures price index, the Fed’s preferred inflation measure, rose 3.3% year-over-year, matching consensus forecasts and marking the highest level in two and a half years. Meanwhile, capital goods orders unexpectedly fell 1.1% in April, weekly unemployment claims rose to 215,000, and first-quarter GDP was revised downward to 1.6% annualized from 2.0%.

Treasury markets initially weakened amid rising oil prices but recovered ground as economic softness suggested potential headwinds for aggressive rate hikes. The 10-year Treasury yield retreated to 4.469%, down 1.4 basis points, while European sovereign bonds also declined with German Bund yields slipping to 2.986% and UK gilts falling to 4.843%. The eurozone economic sentiment index improved to 93.5 in May, exceeding expectations of 93.0.

Market participants now assign only a 3% probability to a 25-basis-point rate cut at the June 16-17 Federal Open Market Committee meeting. Hawkish commentary from Fed officials, including Governor Lisa Cook and Minneapolis Fed President Neel Kashkari, emphasized ongoing concerns about inflationary pressures and the need for restrictive monetary policy.

Global equity markets showed mixed performance, with the Euro Stoxx 50 declining 0.46%, Japan’s Nikkei falling 0.47%, while China’s Shanghai Composite edged up 0.12% after hitting a five-week trough. In corporate news, Snowflake shares jumped 33% after strong revenue results and raised guidance, while Dollar Tree led S&P 500 gainers with a 16% surge on solid earnings and upwardly revised forecasts.

Meanwhile, tensions flared in the Middle East as Israel expanded operations in Lebanon, potentially complicating diplomatic efforts between Washington and Tehran. The U.S. Treasury Department also sanctioned Iran’s Persian Gulf Strait Authority to prevent revenue collection from maritime traffic through the strategically vital waterway.

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