U.S. and European equities declined in volatile trading on Tuesday, while oil prices advanced. Traders are struggling to assess the situation as potential outcomes of the Middle East conflict remain highly uncertain, with fighting ongoing and former President Trump promoting negotiations. Investors still lack a clear view on the direction of the war.
U.S. stock index futures edged lower. Futures for the Dow Jones Industrial Average and the S&P 500 both fell 0.3%, while futures for the tech-heavy Nasdaq index also dropped 0.3%.
In Europe, the STOXX 600 index declined 0.4%, following a 0.6% gain during Monday's sharp swings. Asian markets closed higher across the board, though they retreated from their intraday peaks.
Traders continued to digest a flood of news regarding the U.S.-Israel conflict with Iran after Trump stated on Monday that the war could be nearing an end following what he described as "productive talks." The initial optimism sparked by his comments faded after a report indicated that U.S. allies in the Persian Gulf are moving closer to joining the fight against Tehran.
Israeli officials stated on Tuesday that Trump desires a deal with Iran, but successful negotiations at this stage are unlikely.
"The underlying situation remains extremely fragile, or precarious. It doesn't appear that all involved parties are on the same page... Trump can say what he wants, but the (Strait of Hormuz) is closed now and will remain closed until there is agreement from all Iranian sides, which is precisely the problem," said Tony Sycamore, Market Analyst at IG.
Oil Prices Top $100 Oil prices resumed their upward trajectory on Tuesday as the conflict persists and the flow of roughly one-fifth of the world's oil and liquefied natural gas through the Strait of Hormuz remains constrained.
After Trump announced a delayed action, oil prices fell by as much as 15% yesterday; however, on Tuesday, prices climbed back towards $100 per barrel. Brent crude rose 2.2%, surpassing $102 per barrel.
European natural gas prices fell, with the benchmark Dutch TTF front-month contract dropping 1.6% to €55.78 per megawatt-hour, following a significant decline in the previous session. Analysts at ANZ noted that the sell-off in gas has been relatively muted compared to oil, "because recent damage to infrastructure in the region will have a lasting impact on supply."
"This is a very tricky situation. If a deal is reached within five days, a market rebound is possible, and investors might be able to overlook this crisis temporarily; but if no deal is reached, a recession could occur. The range of potential outcomes remains very wide, which also explains why market volatility is so intense," said Arnaud Girod, Head of Cross-Asset Strategy at Kepler Cheuvreux.
The market's sharp fluctuations indicate that investors remain cautious. Renewed tensions could keep oil prices elevated, thereby boosting inflation and strengthening expectations that policymakers will delay easing or even implement further monetary tightening.
"This war has already caused lasting damage to infrastructure, so even if it ends soon, energy prices are likely to stay higher for longer, while bond and stock prices could remain lower for an extended period," said Thomas Mathews, Head of Asia-Pacific Markets at Capital Economics.
"Until we see Iran's next move in this war, I'm not getting too hopeful about this bet just yet," said Gerald Gan, Chief Investment Officer at Reed Capital Partners in Singapore. Gan mentioned he has increased his cash holdings while adding to put options on the S&P 500.
Tensions Remain High Overnight, Iran launched missiles and drones at Israeli targets including Eilat, Dimona, and Tel Aviv, as well as U.S. military bases in the Middle East. Saudi Arabia stated it intercepted a drone in its Eastern Province; Kuwait reported that some power transmission lines ceased operations following the Iranian attacks. Air raid sirens were also heard in Bahrain.
Meanwhile, Semafor, citing a U.S. official, reported that the U.S. will continue strikes against Iran, with the pause measure applying only to attacks targeting Tehran's energy facilities. On the Iranian side, Fars News Agency reported that U.S. and Israeli attacks damaged a gas pressure reduction station and an administrative building in the central city of Isfahan. Fars also stated that a gas pipeline leading to the Khorramshahr combined-cycle power plant in southwestern Iran was attacked.
The market remains "highly alert" to further developments, according to Anna Wu, Cross-Asset Strategist at Van Eck Associates Corp. She said, "Most investors are still waiting for confirmation of some form of negotiation between Iran and the U.S. to seek clearer direction."
Abandoning Hopes for Central Bank Easing With no clear signs of a conflict resolution, traders began pricing in a more hawkish global interest rate outlook. U.S. Treasury yields moved higher on Tuesday after overnight declines. The two-year yield rose as much as 8.5 basis points to a high of 3.916% before pulling back to around 3.882%, still up 5 bps on the day; the benchmark 10-year yield advanced 3 bps to 4.368%.
In the eurozone, the Netherlands and Germany were scheduled to hold government bond auctions, with the former selling ultra-long-term bonds and the latter issuing shorter-dated paper. UK gilt yields retreated from Monday's highs.
The inflationary shock from energy has led investors to abandon hopes for further global monetary easing, instead beginning to bet on interest rate hikes in most developed economies.
Markets now anticipate the Federal Reserve will keep rates unchanged this year, with futures pricing indicating only a slight chance of a hike; meanwhile, the Bank of England and the European Central Bank are widely expected to raise rates.
"Unless the (Strait of Hormuz) reopens very quickly, we are still more likely to see higher rates in the coming weeks, alongside a significant increase in costs for oil-importing nations," said Kit Juckes, Head of FX Strategy at Societe Generale.
Gold Fluctuates Meanwhile, the U.S. dollar rebounded from Monday's lows, pushing the euro down 0.27% to $1.1581, and sterling down 0.5% to $1.339.
In precious metals, spot gold held steady around $4,400. Before Trump's announcement on Monday, gold had fallen to a four-month low, breaching $4,100, due to expectations that U.S. rates would remain higher for longer. Analysts at Saxo Bank stated, "Gold was sold off because it remains one of the few highly liquid assets that has still posted gains over the past year."
Wall Street's Sole Resilient Theme Amid a shaky start and uncertain prospects for U.S. stocks this year, one trading theme has remained robust: going long on memory chips and data storage sectors.
"What's being sold are the big tech giants, which are underperforming; the money is flowing into infrastructure, memory chips, and data storage sectors," said Rob Thummel, Senior Portfolio Manager at Tortoise Capital.
"The memory sector is showing unprecedented growth potential, coupled with significant pricing power. While the term 'safe' might not be entirely accurate, the investment certainty for these companies is noticeably higher compared to other parts of the AI supply chain," said Jamie Senior Semiconductor Industry Analyst at Neuberger Berman.
SanDisk has been the top performer in the S&P 500 over the past two years, surging over 1850% since its February 2025 listing; Western Digital and Seagate both rank among the index's top twenty gainers. Micron, despite a 12% pullback last week due to market concerns over its aggressive expansion plans, still surged 42% in 2026, placing it among the top twenty-five gainers.
In comparison, the S&P 500 is down 3.9% year-to-date, the more tech-heavy Nasdaq 100 has fallen 4.2%, and the Philadelphia Semiconductor Index has gained only 9.7%.
Stocks in Focus Jefferies rose over 15% pre-market on reports that Sumitomo Mitsui Financial Group is considering acquiring the investment bank.
Smithfield Foods, the largest U.S. pork processor, gained about 5% pre-market after reporting better-than-expected earnings.
Apollo Global Management fell over 3% pre-market as it limited redemptions for one of its private credit funds due to a surge in withdrawal requests.
Li Auto advanced over 4% pre-market after announcing a $1 billion stock repurchase plan.
Comments