Stocks pressured as Middle East hostilities boost inflation risks; Dow falls to 3-week low

Author: Rich Asplund Source: Barchart Reading Time: 7 minutes

Market Overview

The S&P 500 Index ($SPX) (SPY) closed Monday down -0.19%, the Dow Jones Industrial Average ($DOWI) (DIA) closed down -0.59%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed up +0.04%. September E-mini S&P futures (ESU26) fell -0.20%, while September E-mini Nasdaq futures (NQU26) rose +0.01%.

Stock indexes settled mixed on Monday, with the Dow Jones Industrials falling to a 3-week low. Early gains were given up as rising crude oil prices boosted bond yields and undercut stocks. Crude oil rose to a 5-week high amid concerns that the US-Iran conflict will worsen and lead to higher inflation. The 10-year T-note yield rose +5 basis points to 4.60%.

Geopolitical Developments

The US conducted a ninth straight day of airstrikes on Iran, targeting military installations and communications networks in an effort to reopen the Strait of Hormuz. Iran retaliated by launching drones and missiles at US bases in Kuwait, Jordan, Bahrain, and Iraq, and by attacking tankers transiting the Strait of Hormuz.

According to The New York Times, the US is sending additional warplanes to the Middle East, including F-35 and F-16 fighter jets, signaling a possible expansion of military operations. President Trump on Monday vowed that Iran "will pay" for killing three US soldiers in recent days.

The conflict widened further after Houthi rebels announced they would impose a maritime blockade on Saudi Arabia in retaliation for what they describe as the kingdom's siege on the Yemeni capital—a potential threat to Saudi Arabian crude exports through the Red Sea.

However, WTI crude oil (CLQ26) prices erased gains and briefly turned negative after Iran stated it would not abandon diplomacy, noting that Qatar and Pakistan had offered to mediate a 10-day ceasefire between the US and Iran.

Earnings Outlook

Strong Q2 earnings expectations remain a bullish factor for stocks. Forecasts from Bloomberg Intelligence suggest Q2 earnings may increase by +23%, close to Q1's blowout growth of +30%—more than double the +12% analysts had expected. AI spending is projected to drive the majority of earnings growth, with AI infrastructure stocks expected to contribute nearly 60% of the S&P 500's earnings-per-share growth in Q2.

The Nasdaq 100 settled slightly higher on Monday as short covering emerged in chipmakers and AI-infrastructure stocks ahead of megacap technology earnings this week, beginning with Alphabet on Wednesday.

Interest Rates

September 10-year T-notes (ZNU6) closed down -13 ticks, with the 10-year T-note yield rising +4.9 basis points to 4.596%. T-notes came under pressure as crude oil rallied to a 5-week high, boosting inflation expectations. Losses accelerated after President Trump threatened a disproportionate response for any Americans killed by Iran.

European government bond yields also moved higher:

• 10-year German bund yield: +2.4 basis points to 3.150%
• 10-year UK gilt yield: +8.1 basis points to 5.032%

German June PPI fell -0.3% month-over-month and rose +1.8% year-over-year, in line with expectations.

Swaps are discounting a 5% chance of a +25 basis point ECB rate hike at its next policy meeting on Thursday.

Federal Reserve Expectations

Markets are discounting a 17% chance of a +25 basis point rate hike at the next FOMC meeting on July 28–29.

Global Markets

Overseas stock markets settled mixed on Monday:

• Euro Stoxx 50: Closed down -0.06%
• China's Shanghai Composite: Recovered from a 10.5-month low, closing up +0.85%
• Japan's Nikkei-225: Did not trade, with Japanese markets closed for the Marine Day holiday

US Stock Movers

Home builders and suppliers fell on Monday after the 10-year T-note yield rose.

This article originally appeared on Barchart.