Tensions in the Middle East Drives Oil Prices to 6-Month High and Geopolitical Risks Rattle Global Markets

A robust jobs report mitigates economic concerns, but geopolitical tensions persist

• Market turbulence underscores uncertainty.
• Strong employment growth boosts confidence despite the market downturn.
• Oil prices surge amid Middle East tensions.

Thursday witnessed an unusual market shift, deviating from its typical trajectory.

Initially climbing by 1%, stocks unexpectedly reversed course, concluding the day with losses exceeding 1%. The S&P 500 experienced a decline of 1.23%, as all eleven sectors closed in negative territory, while the Nasdaq Composite saw a 1.4% drop. Such dramatic turnarounds, occurring roughly 10% of the time according to data from tastylive, provoke uncertainty about the market's response to the latest jobs report.

March employment data exceed expectations

This morning, the March employment report was released, surpassing expectations. Forecasts anticipated 205,000 new jobs and an unemployment rate of 3.9%. However, the actual figures exceeded predictions, revealing 303,000 new jobs and a decrease in unemployment to 3.8%.

Key sectors such as leisure and hospitality, government, and education/healthcare were primary contributors to this growth. Equities initially faltered following the announcement but managed to recover much of the lost ground shortly after. Conversely, bond prices fell, leading to an increase in interest rates, with the benchmark 10-year yield rising to 4.37%.

Thursday's steep decline resulted in both the S&P 500 and Nasdaq closing below their 21-day moving averages, marking a significant breach in support for the previously robust market. Notably, trading volume surged, and volatility spiked by 14%, culminating in the VIX closing at 16.35.

Remarks from Fed members alter market sentiment

The day commenced with economic indicators revealing initial jobless claims surpassing forecasts, which some interpreted as favorable for potential interest rate cuts by the Federal Reserve. However, sentiments shifted following remarks from Federal Reserve members.

Minnesota Federal Reserve President Kashkari, advocating for rate cuts, acknowledged that strong economic data might obviate the need for such measures this year. Similarly, Richmond Federal Reserve President Barkin advised cautiousness, suggesting a gradual approach to rate adjustments.

Amidst these deliberations, Israel's warning of potential retaliatory measures following its attack on an Iranian diplomatic facility in Damascus escalated tensions in the already volatile Middle East. Consequently, oil prices surged, with crude closing at $90.65, its highest level since October of the previous year.

Earnings season begins

Earnings season commences with banks leading the charge. While first-quarter earnings growth was modest at 3.6%, projections for subsequent quarters are considerably more optimistic. The Magnificent Seven, previously instrumental in driving market momentum, are facing challenges, with notable declines observed, such as Apple's (AAPL) 12% stock decrease this year and recent layoffs within its electric car division.

Two opposing forces seem to shape the market's trajectory: the desire for interest rate cuts versus the significance of robust earnings. While rate cuts typically stimulate a weak economy, the current economic growth suggests a different scenario. Strong earnings coupled with steady macroeconomic expansion bode well for continued market advancement, although risks of earnings shortfall or inflationary growth loom.

As the focus shifts to upcoming economic data such as the consumer price index (CPI), producer price index (PPI), and corporate earnings, volatility is anticipated to persist, potentially leading to choppy trading in the coming days. Nonetheless, adhering to long-term investment strategies remains prudent amidst market fluctuations.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan

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