- The stock market had a red week due to geopolitical tensions and a decline in the tech sector.
- Downbeat US CPI and PPI reports last week briefly supported equities.
- The US has attacked Iran for nine consecutive days, causing panic and uncertainty.
Equities fell on Monday as a spike in oil prices fueled inflation worries. Oil has recovered from lows hit after the US and Iran signed a new ceasefire deal. The rebound has resulted from the recent escalation of tensions between the two. At the same time, a decline in the tech sector weighed on stocks.
S&P 500 weekly performance (Source: Bloomberg)
The stock market had a red week due to geopolitical tensions and a decline in semiconductor and AI stocks. However, there was a brief rally after the US released its CPI and PPI reports, which revealed softer-than-expected inflation.
The headline consumer inflation number came in at 3.5%, lower than the estimate of 3.8%. Meanwhile, wholesale inflation eased by 0.3% in June, surprising experts who had expected no change. The two reports reduced concerns about inflation and eased pressure on the Fed to increase borrowing costs.
The Iran war, which started in late February, caused a significant increase in fuel prices, which drove inflation higher. As a result, the Fed took on a more hawkish stance, increasing the likelihood of more than one rate hike this year. High borrowing costs hurt the business environment, weighing on equities. However, at the time, a rally in the AI sector overshadowed these concerns. Moreover, oil erased all its wartime gains by July.
Unfortunately, recent events have escalated tensions in the Middle East, causing a sharp pivot in oil prices. The US has attacked Iran for nine consecutive days, causing panic and uncertainty. At the same time, the tech sector is facing a reality check, and semiconductor and AI stocks are pulling back. Therefore, the likelihood of higher borrowing costs is causing more damage to the stock market.
If the conflict grows, oil might retest levels hit at the height of the war. However, some investors remain optimistic, especially after reports that intermediaries were still communicating with Iran. This keeps alive hopes that talks will resume.
“Investors still don’t think Trump has the tolerance for a material escalation of the US force posture in the Middle East (i.e deploying troops), and if that’s the case, then some type of diplomatic resolution is inevitable,” wrote Adam Crisafulli of Vital Knowledge.
