Oil, gold, U.S. Treasurys notch gains as Iran vows revenge for killing of military commander
U.S. stocks on Friday ended a holiday-shortened week solidly lower, with the Dow shedding more than 230 points, following escalating tensions in the Middle East and U.S. manufacturing activity that fell to its lowest reading in about a decade.
How did benchmarks perform?
The Dow Jones Industrial Average DJIA, -0.81% shed 233.92 points, or 0.8%, at 28,634.8. The S&P 500 SPX, -0.71% fell 23 points, or 0.7%, to 3,234.85. The Nasdaq Composite COMP, -0.79% slipped 71.42 points, or 0.8%, to 9,020.77. All three benchmarks finished off their lows for the session, however.
The decline marked the worst for the Dow and the S&P 500 since Dec. 3 and the sharpest daily slump for the Nasdaq since Dec. 2, according to Dow Jones Market Data.
For the week, the S&P 500 lost 0.2%, while the Dow shed less than 0.1%. The Nasdaq Composite, meanwhile, managed a weekly gain of 0.2%.
What drove the market?
The Pentagon confirmed late Thursday that the U.S. military had killed Qassem Soleimani, the head of Iran’s Islamic Revolutionary Guard’s Quds Force, and said the strike was aimed at deterring future Iranian attacks.
Iran’s supreme leader, Ayatollah Ali Khamenei, declared three days of mourning for Soleimani’s death and said that a “hard revenge awaits criminals,” responsible for the attack. The Pentagon also said Friday afternoon it was dispatching more than 3,000 additional troops to the Middle East.
President Donald Trump said the U.S. remained “ready and prepared” to act if Americans are threatened following Soleimani’s killing, in televised remarks from his Mar-a-Largo resort in Florida. Earlier Friday he issued a number of tweets and said the top Iranian military commander “should have been taken out many years ago.”
The prospect of sharp retaliation by Iran could keep market participants unnerved in the coming days and weeks.
“The initial reaction will lead to a risk-off for equity markets and upward pressure on oil prices,” Steven Chiavarone, portfolio manager at Federated Investors, told MarketWatch. “But what we don’t know is the timing and severity of Iran’s expected reaction.”
Indeed, the investor flight from risky assets toward traditional safer havens, including gold and U.S. Treasurys, stood in contrast to market action on Thursday, which saw all three major U.S. stock indexes post strong gains, ending the first trading session of 2020 at records. Markets were closed on Wednesday for New Year’s Day.
Still, stocks closed out the session with declines that were less severe than some market participants would ordinarily have expected, given the threat of a Middle East military confrontation.
Chiavarone said the traditional playbook for investors was to look past jitters unless it appeared to impede global economic growth. More important to the bull market’s momentum was the direction of growth, how much stimulus central banks provided, and if trade tensions continued to wane with the forging of the so-called “phase one” tariff deal between the U.S. and China, he said.
Minutes of the Federal Reserve’s last meeting, meanwhile, showed increased optimism in December among senior officials about the economy as Beijing-Washington trade tensions eased, but worries lingered about growth, including stubbornly low inflation.
Friday also saw worse-than-expected U.S. manufacturing data underlined risks to economic growth. The Institute for Supply Management’s closely watched December U.S. manufacturing purchasing managers index fell to 47.2%, its lowest since June 2009, from a reading of 48.1% in November, leaving the gauge in contraction. Economists surveyed by MarketWatch, on average, had expected the index to rise to 48.8%.
Separately, U.S. November construction activity rose by 0.6%, a sharp increase from the 0.1% rise registered in October.
“Investors are just trying to get their bearings for the year to come,” John Carey, director of U.S. equity income at Amundi Pioneer, told MarketWatch. “Now there is a wrench thrown into the works with this geopolitical uncertainty.”
Carey already had been feeling conflicted about U.S. stocks hitting all-time highs to end 2019. “I’ve been cautious for months,” he said. “Now I think you’ve got earnings to think about, and multiples are a little bit high.”
Investors also were hearing from a number of Federal Reserve officials, including Dallas Fed President Robert Kaplan, who told CNBC on Friday that any reaction in oil prices to current geopolitical tensions likely will be more muted than a decade ago.
Chicago Fed President Charles Evans told CNBC on Friday that he remained upbeat on the economy and expected U.S. gross domestic product to expand between 2% to 2.25% in 2020, despite the contraction in manufacturing.
Which stocks were in focus?
The surge in oil prices sent airline stocks lower, dogged by the threat of higher fuel costs that could crimp their earnings. Shares of American Airlines Group Inc. AAL, -4.95% fell 5%, Delta Air Lines Inc. DAL, -1.66% dropped 1.7%, and United Airlines Holdings Inc. UAL, -2.05% shed 2.1%.
Shares of U.S. energy companies closed mixed, after giving up earlier gains. The SPDR Energy Select Sector ETF XLE, -0.30% closed 0.3% lower. Exxon Mobil Corp. XOM, -0.80% fell 0.8%, Occidental Petroleum Corp. OXY, +2.42% jumped 2.4% and Marathon Oil Corp. MRO, +0.51% shares gained 0.5%.
Tesla Inc.’s stock TSLA, +2.96% gained 3% after the electric-vehicle maker reported delivery data that met its full-year guidance. For 2019, Tesla said it delivered 367,500 vehicles, within its guidance range of 360,000 to 400,000 vehicles.
Incyte Corp.’s stock INCY, -9.39% slumped 9.4% after the company said a key study of an experimental drug failed to hit its goal.
How did other markets trade?
Oil futures jumped, with U.S. benchmark West Texas Intermediate crude for February delivery CLG20, +3.04% settling 3.1% higher at $63.05 a barrel, its best finish in more than seven months.
Haven-related buying pushed gold futures GCG20, +1.77% to a 4-month high, closing up 1.6% Friday and 2.3% for the week. The yield on the 10-year U.S. Treasury note TMUBMUSD10Y, -4.69% tumbled 9.3 basis points to 1.787%, marking the lowest rate in four weeks.
As for currencies, the yen USDJPY, -0.42% strengthened against the U.S. unit by 0.2% to trade at ¥108.6 to the dollar. The ICE U.S. Dollar index DXY, +0.05%, which measures the greenback’s strength against its six major rivals, was nearly flat at 96.90.