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Fundamental Analysis

Equities Dip, Yields Climb as Geopolitical Concerns Rise

  • Tensions in the Middle East after Iran’s attack on Israel sent US yields up.
  • US retail sales rose by 0.7% in March, beating forecasts for a 0.3% increase.
  • Goldman Sachs reported first-quarter earnings that beat Wall Street estimates.

Equities ended down on Monday as Treasury yields rose due to geopolitical tensions and upbeat US data. However, they had rallied earlier in the session due to positive earnings reports from financial institutions.

Tensions in the Middle East after Iran’s attack on Israel sent US yields up as investors scrambled for safety. There are worries that Israel might escalate the war by reacting to Iran’s attack. This uncertainty made most investors risk-averse. As a result, they dumped risky assets like equities and went for safer assets like the dollar. 

Talks for an end or pause to the war in Gaza have yielded very little over the past few months. As the war continues, there are increasing disruptions in the distribution of commodities like oil. This, in turn, pushes oil prices up and drives inflation in some major economies. A spike in inflation could prolong higher interest rates in the US, leading to a decline in equities.

US retail sales (Source: Census Bureau)

US retail sales (Source: Census Bureau)

At the same time, the US released its retail sales report, revealing a bigger-than-expected jump. Retail sales rose by 0.7% in March, beating forecasts for a 0.3% increase. Notably, the upbeat report was a good indicator of economic resilience, boosting equities temporarily. However, the realization that the Fed would delay rate cuts reversed the gains.

The increase in sales follows a hot inflation report and positive employment figures, showing resilience in the US economy. Consequently, investors are less certain about the outlook for rate cuts in the US. Now, traders believe the Fed will start cutting rates in September, well after most other major central banks. This also contributed to the rally in Treasury yields.

Markets will pay close attention to Powell’s speech on Tuesday to see where the Fed stands. Policymakers like Mary Daly have assumed a more hawkish stance as they lose confidence that inflation will reach the 2% target. More upbeat data could further delay rate cuts, raising the risk that the Fed will start cutting rates during the election period.

Meanwhile, stocks gained during the session after positive earnings from major companies. Notably, Goldman Sachs reported first-quarter earnings that beat Wall Street estimates. As a result, the stock rallied. Moreover, M&T Bank rose after reporting better-than-expected annual net income from interest.