Markets sold off Wednesday as Iran's attacks on Kuwait shattered ceasefire hopes, while oil surged past $95 on prolonged supply disruption fears.
The geopolitical tensions in the Middle East just got murkier as Iran began attacks on Kuwait and Bahrain, two of its Gulf neighbors, dousing any hopes of a near-term resolution to its broader war with the U.S. The escalation set-off a risk-off mood in the markets, sending equity indices down from their peaks and crude oil futures higher.
What Led to Latest Escalation
Iran launched both ballistic missile and drone attacks on Kuwaiti international airport on Wednesday, killing an Indian passenger and injuring 63 people. This marked the first deadly attack since the April 8 ceasefire agreement between the U.S. and Iran came into effect, although the truce had all along remained fragile amid sporadic violations from either side.
Iran’s Islamic Revolutionary Guard Corps. (IRGC) claimed that the attacks were in retaliation to U.S. strikes on its Qeshm Island. Detailing on the Qeshm Island strikes, the U.S. Central Command said it was done in self-dense in response to attempted attacks by Iran across the Middle East on Tuesday.
Meanwhile, U.S. President Donald Trump maintained that the talks between the warring sides were ongoing, although remaining non-committal about whether a deal will materialize.
Markets Caught in the Crossfire
Equity markets, which had been rallying steadily since recovering from the war's initial shock, took a hit on the latest escalation. The S&P 500 entered the week on the back of nine consecutive weekly gains. During these nine weeks, the index gained about 16%, making it the strongest nine-week winning streak in the last 75 years.
S&P 500 Defiantly Pushes Higher (YTD Chart)
Source: TradingView
Commenting on the rally, LPL Chief Technical Strategist Adam Turnquist said the momentum appeared firmly bullish but cautioned that overbought conditions were building within some part of the technology sector. He also noted that the market breadth lagged the headline index.
The renewed tension in the Middle East is on track to stall S&P 500’s nine-session winning run as the broader gauge was down moderately by early afternoon trading on Wednesday. The index settled at a fresh peak of 7,609.78 on Tuesday, and in the process also set a record intraday high of 7,620.90. The Nasdaq Composite was also seen down by more than 0.50%.
The Nasdaq 100 Index, however, experienced a more shallow pullback, down only marginally, as the artificial intelligence (AI) trade cushioned the downside.
On the other hand, the West Texas Intermediate (WTI) crude futures climbed more than 1.50%, crossing the $95 threshold for the first time since May 22. A prolonged war, and by extension a lengthier energy supply disruption, could stoke inflationary pressure further. This dynamics is likely to keep the Federal Reserve on hold when its rate-setting committee meets on June 16-17.
The nine week rally was fueled by the assumption that the war would soon cease, and Wednesday’s attacks have challenged that assumption. If the Gulf situation doesn’t stabilize soon enough, the market’s record run faces the risk of reversing. More importantly, the economy that has been chugging along at a fairly trend-like growth could slow down, resulting in a stagflationary environment, pressuring stocks further.
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