Wall Street wobbles as Middle East tensions rattle markets

U.S. stocks fell on Wall Street as traders weighed the potential for an escalating Middle East conflict against positive economic indicators. Meanwhile, oil and the dollar continued their upward trajectory.

The S&P 500 slipped 0.2%, while the Nasdaq 100 closed slightly lower following a volatile morning session. Wall Street’s mood was shaken by ambiguous comments from President Joe Biden regarding U.S. backing for Israeli strikes on Iranian oil facilities.

Israel is preparing a strong response to Tuesday’s missile attack by Iran, which may include targeting oil facilities and strategic sites within the country.

Oil prices surged, with Brent crude climbing above $77 per barrel, marking the longest streak of daily gains since August. West Texas Intermediate crude also rose above $73.

Investors are increasingly worried that Israeli strikes on critical Iranian assets could trigger a severe retaliation from Tehran, escalating the conflict and potentially disrupting global energy supplies.

Market volatility intensifies

These developments have put major U.S. stock indexes on course for their first weekly loss in four weeks as the world awaits Israel’s response to Iran’s missile attack.

Israeli warplanes continued bombing Beirut following the deaths of eight soldiers in clashes with Hezbollah in southern Lebanon. Wall Street’s fear gauge, the VIX, rose, signalling the potential for increased market volatility ahead.

Thomas Lee, co-founder of Fundstrat, told Bloomberg, "The volatility index suggests we’re still in a period of October uncertainty." However, he anticipates investors will "buy the dip," as historical trends remain favorable for the S&P 500.

Earlier in the session, stocks briefly erased losses after a report indicated that the U.S. services sector grew in September at its fastest pace since February 2023. The Institute for Supply Management’s services index jumped to 54.9, exceeding estimates; a reading above 50 indicates expansion.

Other economic data showed U.S. jobless claims rose slightly last week but remained consistent with a low number of layoffs. Continuing claims, which measure the number of individuals receiving unemployment benefits, stayed at 1.83 million, according to Labor Department data released Thursday.

Searching for clarity

Amid ongoing geopolitical uncertainties, investors are closely watching for signs of the U.S. economy’s health, with the monthly jobs report due Friday. Unemployment is expected to remain steady at 4.2% in September, while payrolls are forecast to rise by 150,000 jobs.

Callum Pickering, chief economist at Peel Hunt, shared on Bloomberg TV, "I’m definitely anxious ahead of tomorrow’s jobs report. If unemployment ticks up, I wouldn’t be surprised to see markets shift back to expecting a 50 basis point rate cut, and then the key question will be how the Fed reacts."

On the corporate side, Tesla shares dropped following the departure of a key executive just days before the launch of its self-driving robotaxis. Levi Strauss shares also slid after the company lowered its full-year revenue growth forecast.

Meanwhile, Bloomberg’s dollar index rose for a fourth consecutive day, buoyed by rising Treasury yields. The British pound suffered its worst day since 2022 after a Bank of England official suggested the central bank may adopt a more aggressive approach to interest rate cuts.