US stocks declined, and equity-market volatility reached a six-month peak after Iran’s military strike on Israel, prompting concerns about the potential escalation of conflict into a full-blown war and its impact on energy supplies from the region.
Traders closely monitored market reactions following Iran’s first strike on Israel from its own territory on Saturday.
Tehran launched drones and missiles in retaliation for a suspected Israeli attack on its consulate in Damascus on April 1, which resulted in the deaths of several military commanders.
The S&P 500 index on Wall Street, initially up by 0.8 percent, reversed course to close down 1.2 percent as investors assessed the implications of heightened tensions in the oil-rich region.
“Markets are worrying about Israel’s response to Iran’s missile bombardment over the weekend,” said Mike Zigmont, head of trading at Harvest Volatility Management.
The Vix index, Wall Street’s fear gauge, rose to its highest level since late October, reflecting increased market uncertainty.
Major tech stocks such as Microsoft, Apple, and Alphabet experienced notable declines on Monday, with decreases of 2 percent, 2.1 percent, and 1.8 percent, respectively.
Oil prices fluctuated throughout the day, with Brent crude initially down almost 1.5 percent but later recovering to stand 0.1 percent lower at $90.33 per barrel. West Texas Intermediate rallied from similar losses to end flat at $85.64 per barrel.
Daniel Hynes, senior commodity strategist at ANZ Bank, noted that the attacks were anticipated, which eased concerns in the oil market.
“A geopolitical price premium was already built in before this event.” He said.
The fluctuations in prices suggest investors were uncertain about how to interpret the weekend’s events, oscillating between concerns about a flight to safety and potential inflationary impacts.
“If the world were really scared, Treasury yields would be lower [and] they’re not,” observed Zigmont. Meanwhile, Treasury yields rose to five-month highs, indicating that inflationary concerns were a top priority for bondholders.
The price of gold, considered a safe-haven asset, rose 1.7 percent to $2,382 per troy ounce, setting a new record. US President Joe Biden and other allies have urged Israel to respond cautiously.
Israeli Prime Minister Benjamin Netanyahu’s war cabinet met on Sunday and Monday, but no decision regarding the country’s response has been announced.
However, Chief of the Israel Defense Forces Herzi Halevi stated after the Monday meeting that “this launch…will be met with a response.”
Experts cautioned that a severe Israeli retaliation could escalate the conflict, potentially disrupting oil supplies from the region and driving up prices.
“In such a scenario, we think the risk to oil is not insignificant,” said Helima Croft, head of global commodity strategy at RBC Capital Markets and a former CIA analyst.
The conflict risks impacting the tight global oil market as demand rises in major economies like the US and China while OPEC+ producers restrict supply.
Bob McNally, president of consultancy Rapidan Energy and a former energy adviser to US President George W. Bush, warned that the fallout from the Iranian strike could push prices “towards, if not beyond, $100 per barrel.”
“A significant Israeli retaliation could trigger a destabilizing retaliatory cycle and move this conflict up the escalation ladder,” he added.
The European Stoxx 600 share index closed 0.1 percent higher, supported by strong performances in industrial and consumer groups, while London’s energy-heavy FTSE 100 fell 0.5 percent.
