Stocks Fall on Heightened Geopolitical Risks in the Middle East

Rich Asplund - Barchart - Fri Apr 12, 10:16AM CDT

The S&P 500 Index ($SPX) (SPY) this morning is down -1.06%, the Dow Jones Industrials Index ($DOWI) (DIA) is down -0.96%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -1.38%.

Stock indexes today are under pressure, with the Dow Jones Industrials falling to a 2-month low. Heightened geopolitical tensions have fueled risk aversion and sparked long liquidation in stocks today. Risk aversion has also fueled safe-haven demand for gold and pushed gold prices to a record high today, and sparked a rally in crude prices by more than +2% to a 5-1/2 month high. Western intelligence assessments said a missile or drone attack by Iran or its proxies against Israeli government assets is imminent within days in retaliation for Israel’s attack on an Iranian embassy compound in Syria.

Stocks extended their losses on today’s news that showed the University of Michigan US Apr consumer sentiment fell more than expected, and the University of Michigan US Apr inflation expectations unexpectedly increased.

Chip makers are also moving lower today after the Wall Street Journal reported the Chinese government has ordered its domestic telecom carriers to replace foreign chips in their core networks by 2027.

Q1 bank earnings results today have been mixed. JPMorgan Chase is down more than -5% after reporting Q1 managed net interest income below consensus and forecasting full-year net interest income below estimates. However, Wells Fargo & Co. reported Q1 revenue above consensus, and Citigroup reported better-than-expected Q1 FICC sales and trading revenue.

Chinese trade news today was weaker than expected, a bearish factor for global growth prospects. China Mar exports fell -7.5% y/y, weaker than expectations of -1.9% y/y and the biggest decline in 7 months. Mar imports unexpectedly fell -1.9% y/y versus expectations of a +1.0% y/y increase.

The University of Michigan US Apr consumer sentiment index fell -1.5 to 77.9, weaker than expectations of 79.0.

The University of Michigan US Apr 1-year inflation expectations unexpectedly rose +0.2 to 3.1%, higher than expectations of no change at 2.9%. Also, the Apr 5-10 year inflation expectations rose +0.2 to 3.0%, higher than expectations of no change at 2.8%.

Today’s decline in bond yields is supportive of stocks. Increased safe-haven demand from war jitters and falling stocks is boosting government bond prices today.

Boston Fed President Collins said the strength of the US economy allows time for patience from the Fed, and she is looking for two Fed rate cuts this year.

The markets are discounting the chances for a -25 bp rate cut at 6% for the next FOMC meeting on April 30-May 1 and 29% for the following meeting on June 11-12.

Overseas stock markets today are mixed. The Euro Stoxx 50 is down -0.40%. China's Shanghai Composite closed down -0.49%. Japan's Nikkei Stock Index rose to a 1-week high and closed up +0.21%.

Interest Rates

June 10-year T-notes (ZNM24) this morning are up +18 ticks. The 10-year T-note yield is down -8.9 bp to 4.497%. T-notes are finding carryover support today from a rally in 10-year German bunds to a 2-week high. Also, today’s stock weakness and war jitters in the Middle East have boosted safe-haven demand for T-notes. In addition, signs of weaker price pressures support T-notes after the US Mar import price index ex-petroleum rose less than expected.

European government bond yields today are moving lower. The 10-year German bund yield fell to a 2-week low of 2.317% and is down -12.1 bp at 2.342%. The 10-year UK gilt yield is down -9.1 bp at 4.110%.

ECB Governing Council member Stournaras said the ECB shouldn't be afraid to shift its "overly prudent" stance on interest rates away from that of the Federal Reserve and "now is the time to diverge."

ECB Governing Council member Kazaks said, "If really nothing changes, then June will be the month where we see the first rate cut" by the ECB.

ECB Governing Council member Mulle said, "The ever-decelerating general price increase in the Eurozone increases the likelihood" of an ECB rate cut in June.

US Stock Movers

Zoetis (ZTS) is down more than -7% to lead losers in the S&P 500 after a Wall Street Journal report on side effects from the company’s drug for arthritis in animals.

Chip makers are under pressure today after the Wall Street Journal reported the Chinese government has ordered domestic telecom carriers to replace foreign chips in their core networks by 2027. As a result, Advanced Micro Devices (AMD) is down more than -3% to lead losers in the Nasdaq 100. Also, Intel (INTC), GlobalFoundries (GFS), ON Semiconductor (ON), ASML Holding NV (ASML), KLA Corp (KLAC), and NXP Semiconductors NV (NXPI) are down more than -3%.

Arista Networks (ANET) is down more than -7% after Rosenblatt Securities double-downgraded the stock to sell from buy with a price target of $210.

JPMorgan Chase (JPM) is down more than -5% to lead losers in the Dow Jones Industrials after reporting Q1 managed net interest income of $23.20 billion, below the consensus of $23.22 billion, and forecasting full-year net interest income of about $90 billion, weaker than the consensus of $90.72 billion.

Cruise line operators are falling today as geopolitical risks boost crude prices by more than +2% to a 5-1/2 month high, which could boost fuel prices and weigh on profits. As a result, Norwegian Cruise Line Holdings (NCLH) and Royal Caribbean Cruises (RCL) are down more than -4%. Also, Carnival (CCL) is down more than -3%.

Globe Life (GL) is up more than +14% to lead gainers in the S&P 500 after issuing a statement on a short-seller report from Fuzzy Panda, saying it “reviewed the report and found it to be wildly misleading.”

Newmont (NEM) is up more than +5%, with gold prices today rallying to a record high and silver prices soaring to a 3-year high.

Energy producers are climbing today, with crude prices up more than +2% at a 5-1/2 month high. As a result, Diamondback Energy (FANG) is up more than +1% to lead gainers in the Nasdaq 100. Also, Mobil (XOM), Occidental Petroleum (OXY), Devon Energy (DVN), Marathon Oil (MRO), and ConocoPhillips (COP) are up more than +1%.

State Street (STT) is up more than +1% after reporting Q1 A1 net interest income of $716 million, better than the consensus of $659.8 million.

Progressive Corp (PGR) is up more than +1% after reporting Q1 net premiums written of $18.96 billion, well above the consensus of $17.60 billion.

Earnings Reports (4/12/2024)

BlackRock Inc (BLK), Citigroup Inc (C), JPMorgan Chase & Co (JPM), Progressive Corp/The (PGR), State Street Corp (STT), and Wells Fargo & Co (WFC).

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.