Global Equity Market Gains Limited by Rising Middle East Tensions

The new worry is a potential escalation of the tensions between the United States and Iran. This could limit gains today by encouraging investors to lighten up their long positions.
James Hyerczyk
Global Equity Risk

The major U.S. stock index futures are under a little pressure early Friday amid concerns over escalating tensions between the United States and Iran. Investors turned defensive after the New York Times reported late Thursday that President Donald Trump approved military strikes on several Iranian targets, but surprisingly pulled back the order to launch the attacks.

At 07:51 GMT, September E-mini S&P 500 Index futures are trading 2959.00, down 1.25 or -0.04%. September E-mini Dow Jones Industrial Average futures are at 26776, up 2 or +0.01% and September E-mini NASDAQ-100 Index futures are trading 7761.50, down 11.25 or -0.15%.

According to the New York Times, Trump approved retaliatory military strikes against Iran on Thursday before changing his mind.

The New York Times, citing senior White House officials, says strikes were planned against a “handful” of targets.

“Planes were in the air and ships were in position, but no missiles had been filed when word came stand down,” the newspaper reported, citing an unnamed senior administration official.

According to the New York Times, top Pentagon officials warned a military response could result in a spiraling escalation with risks for US forces in the region.

The operation was called off after President Trump spent most of Thursday discussing Iran with his national security advisers and congressional leaders, according to AP reports.

Europe Rebounds after Early Weakness

The major European Indexes were trading slightly better Friday morning, rebounding from earlier weakness that was fueled by increasing fears of a military confrontation in the Middle East.

The performance by the pan-European Stoxx 600 Index shows most sectors and major bourses were in positive territory shortly after the opening. Helping to post the index was a strong performance by Europe’s banking sector. Healthcare and technology sectors were the worst performers.

At 08:07 GMT, the UK’s FTSE 100 Index was trading 7445.73, up 21.29 or +0.29%. Germany’s DAX Index was at 12388.91, up 33.52 or +0.27% and France’s CAC Index was trading 5553.09, up 17.52 or +0.32%.

Asian Shares Mostly Lower

Stocks in the Asia-Pacific region were trading mostly lower on Friday, also pressured by rising tensions between the United States and Iran. The moves are bucking the trend established on Wall Street on Thursday.

Losses were likely limited by expectations of a rate cut by the U.S. Federal Reserve in late July. On Wednesday, central bank policymakers kept interest rates unchanged, but opened the door for a possible rate cut in the future. Additionally, the yield on the benchmark 10-year Treasury fell below 2% for the first time since November 2016. This was a clear indication that investors were pricing in a 100% probability of rate cut in July.

At 08:16 GMT, Japan’s Nikkei 225 Index was trading 21258.64, down 204.22 or -0.95%, Hong Kong’s Hang Seng Index was at 28458.07, down 92.36 or -0.32% and South Korea’s KOSPI was trading 2125.62, down 5.67 or -0.27%.

Australia’s S&P/ASX 200 was trading 6650.80, down 36.60 or -0.55% and China’s Shanghai Index was at 3001.98, up 14.86 or +0.50%.

Overview

Investors in the U.S., Europe and Asia are still concerned about a global economic slowdown, but recent activity by the major central banks suggests they are counting on the shift to more dovish policy will be enough to stimulate their respective economies. Furthermore, the hope of a trade deal between the U.S. and China was renewed this week when it was announced that President Trump would meet with China President Xi Jinping at the G-20 meeting in late June.

The new worry is a potential escalation of the tensions between the United States and Iran. This could limit gains today by encouraging investors to lighten up their long positions.

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