Stock market numbers are displayed on the floor of the New York Stock Exchange during afternoon trading on Tuesday.Michael M. Santiago/Getty Images
Major North American stock indexes fell Tuesday along with bond prices and the price of gold as investors worried that a spiralling war in Iran may be growing into a drawn-out regional conflict with global economic implications.
While markets pared earlier losses after comments from U.S. President Donald Trump that the U.S. would insure oil tankers through the Strait of Hormuz and escort them if necessary, analysts said that investors remained concerned about further escalation of the three-day-old conflict.
“The market is still nervous ... risk sentiment will remain very tempered until we get some more concrete signs of de-escalation or negotiation,” George Davis, chief technical strategist, global markets at RBC Capital Markets, said in an e-mailed response to questions.
Canada’s broad TSX/SPX Composite Index fell more than 4 per cent before paring losses to end 2.2 per cent lower at 33,784.94 . It was weighed down by materials companies, with a subindex tracking the sector slumping more than 7 per cent on the day.
The S&P 500 index closed down 0.9 per cent and the tech-heavy NASDAQ index lost 1 per cent.
The drop in North American equities followed slumps in other global stock markets. The broad STOXX 600 index of European shares and Tokyo’s Nikkei 225 both dropped more than 3 per cent on Tuesday, while China’s CSI300 index slipped more than 1.5 per cent.
But in an indication of broader market uncertainty, selling also hit traditional safe havens such as gold and U.S. Treasuries, sending yields higher. Bond yields move inversely to prices.
Lorne Gavsie, head of macro and foreign exchange at CI Global Asset Management in Toronto, said that investors worried about a worsening situation were considering where to take profits and reduce their overall risk.
Gold slid more than 4.5 per cent to around US$5,080 an ounce and the U.S. 10-year yield edged up to 4.061 per cent, though that was off earlier highs. Canada’s 10-year yield was up two basis points at 3.243 per cent, after peaking at about 3.31 per cent earlier in the day. Higher long-term bond yields can be an indication of market expectations for higher inflation.
“Bond markets are not playing their traditional role as a safe haven given the spike in oil prices that risks stoking already-elevated inflation,” Candice Bangsund, vice president and portfolio manager at Fiera Capital in Montreal, said in an e-mail.
Worries about the inflationary impact of higher oil prices have grown as the conflict continues to threaten the flow of crude. On Tuesday, Brent crude, the international benchmark, jumped to more than US$85 per barrel before Mr. Trump’s comments.
Shipping through the Strait of Hormuz remains a major source of uncertainty given the large quantities of crude oil and petroleum products that typically pass through the narrow channel between Iran and the Arabian peninsula.
Oil prices jumped on Monday as the U.S., Israel and Iran stepped up their conflict in the Middle East, with attacks damaging tankers and disrupting shipments from the key producing region.
Reuters
“The near-term direction for markets will largely depend on Middle East developments. The longer the war continues, the greater the risk of further increases in energy prices,” said John Canavan, lead analyst at Oxford Economics, said in a note to clients on Tuesday.
Adding to worries of an extended campaign against Iran, Mr. Trump on Monday said the operation in Iran was planned to last for “four or five weeks” but could go “far longer.” In a social media post, he said his country’s military has enough stockpiled weapons to fight wars “forever.”
Aleksy Wojcik, portfolio manager at Sionna Investment Managers in Toronto, wrote in a note that shutting down oil fields, refineries and gas facilities across the region were among other knock-on effects from the conflict that could affect a broad range of commodities including fertilizers, aluminum and iron ore pellets.
Saudi Arabia on Monday shut down its largest oil refinery, while Qatar halted liquefied natural gas (LNG) production after drone attacks. And Reuters reported on Tuesday that Iraq could expand oil production cuts to more than three million barrels per day as it runs out of storage and is unable to export crude because of the Iran crisis.
“A prolonged conflict of four weeks or more will have implications on physical deliveries ... for months/quarters going forward,” Mr. Wojcik wrote.
A Fidelity poll of financial advisers this week showed that more than three-quarters expected the conflict in Iran to reignite inflationary pressures in the second quarter, though most only expected “short-term turbulence” in oil prices.
Despite the pullback on Tuesday, the S&P 500 remained down just 2.6 per cent from a record intraday high of 7,000.28 touched on Jan. 28, and the fall in the S&P/TSX Composite was from Monday’s record-high close.
Mr. Gavsie said investors should not rush to make decisions in a “very fluid situation.”
“The emotional reaction can be quite strong, but it’s important to take a step back and not overreact ... It may actually be an opportunity for longer term investors to find some value,” he said.
With reports from Meera Raman and Reuters
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