How Serious Is the Israel/Iran Conflict For Markets?
Markets started the week hopeful that Israel’s attack on Iran would subside. Instead, Iran responded. The U.S. President weighed in by demanding an unconditional surrender.
The hostilities between the Middle East countries matter for stock markets. Oil prices react to uncertainties in the region. When oil prices rise, it puts pressure on inflation. That decreases the odds of the Federal Reserve cutting interest rates. It also hurts consumer spending, which would weaken the economy.
The S&P 500 (SPY) and Nasdaq (QQQ) fell by around 0.8% and 0.9%, respectively. The Russell 2000 (IWM) holds mostly small-cap firms. It lost 1.05% since those firms are more sensitive to market conditions.
In Wednesday’s market, investors will turn their attention to the Fed. It will announce its interest rate policy. Economists will want to hear if the central bank will maintain its forecast to cut interest rates twice this year. Bond yields on the longer term pulled back slightly on Tuesday. Inflation rates and a weakening job market might require the Fed to cut interest rates at the September meeting.
Financial institutions benefit from lower rates. Watch Goldman Sachs (GS), JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC). Interest rate spreads offer higher margins on deposits for banks. Lower rates also encourage borrowing, which improves the bank’s business.
