US stocks fell for a second straight session, with the S&P 500 closing lower as renewed Middle East tensions pushed oil prices higher. Investors worry that escalating energy costs could add to inflationary pressures, potentially prompting further interest rate hikes from the US Federal Reserve.
In a significant escalation, US and Iranian forces exchanged attacks for the first time in about a month. US military struck an island in the Strait of Hormuz, prompting Iran to launch strikes against targets in the UAE and Jordan. This new wave of conflict has dashed market hopes for a swift return to normal shipping operations in the critical waterway, keeping crude prices elevated.
The sustained strength in oil prices has also reinforced expectations for tighter monetary policy. Swaps market pricing now suggests a better than 60% probability that the Fed will raise rates at its September meeting.
Speaking at a G20 gathering in Asheville, North Carolina, Fed Chair Walter stated that US economic growth appears to have strengthened. Meanwhile, former President Donald Trump said the Fed Chair would "do what he has to do" on interest rates, but described the prospect of rate hikes as "absurd."
Investors are now looking ahead to this week's US non-farm payrolls report. Chris Larkin from Morgan Stanley's E*Trade cautioned that if the jobs data comes in surprisingly strong, the market may interpret it as bad news, as it could further solidify the case for rate increases.
By the close in New York, the S&P 500 had slipped 0.33% to 7,686.14 points. The Dow Jones Industrial Average fell 0.7% to 53,185.9 points. The Nasdaq Composite dropped 0.12% to 26,370.89 points, while the Nasdaq 100 edged up 0.08% to 29,456.97 points. The Russell 2000 index declined 0.54% to 2,956.452 points.
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