US stocks wipe out gains, brent rises as Israel-Iran war rages on

The US increased strikes on Iran to unprecedented levels as the war that’s engulfed the Middle East hit the two-week mark and continued to upend global markets

• Traders turn to bonds amid Iran conflict and economic concerns
• US GDP growth revised lower; consumer sentiment hits 3-month low
• Fed expected to hold rates steady; inflation remains stubborn

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Volatility gripped Wall Street, with stocks erasing gains as the war in Iran showed no signs of easing. Brent topped $100. Bond traders revived bets on policy easing after sluggish economic data.

The S&P 500 erased a nearly 1% advance as the Wall Street Journal reported the Pentagon is moving a Marine expeditionary unit to the Middle East, with Iran stepping up its attacks on the Strait of Hormuz. Concerns about the inflationary impacts of higher energy costs weighed on Treasuries, but short-dated notes outperformed as traders almost fully priced in a Federal Reserve rate cut this year. A gauge of megacaps extended a plunge from a record to 10%. The dollar was set for the highest since December.

The US increased strikes on Iran to unprecedented levels as the war that’s engulfed the Middle East hit the two-week mark and continued to upend global markets. While recent comments from President Donald Trump and Iran’s new leader have suggested there will be no letup in the conflict any time soon, pressure is building in the US for a de-escalation amid the surge in oil prices.

“There are two paths at this time for markets and the better outcome is a shorter war,” said Chris Zaccarelli at Northlight Asset Management. “Likewise, if the length of the military conflict stretches out much longer than expected, we could see even more negative impacts on the markets.”

The US issued a second authorization letting countries buy more Russian oil that’s stuck on tankers due to sanctions, part of the White House’s push to prevent prices from surging.

Defense Secretary Pete Hegseth said Friday marked the largest attacks against the Islamic Republic, putting the total number of targets hit by the US-Israeli alliance since the beginning of the war at around 15,000. Iran’s new supreme leader is wounded and likely disfigured, he noted.

“On a very-short-term basis, it will likely continue to be a ‘headlines-driven’ market,” said Matt Maley at Miller Tabak. “Investors are staring to worry that the situation in the Middle East could drag on for a long enough period of time for it to have an impact on the economy.”

In the countdown to next week’s Fed decision, traders kept a close eye on a batch of economic reports. Consumer spending barely rose in January after gross domestic product was weaker than previously reported at the end of last year, suggesting the economy lost some momentum before the war with Iran.

Separate data showed job openings rose in January and layoffs fell, signaling that demand for workers was improving before the labor market showed signs of weakness. The core personal consumption expenditures price index — the Fed’s preferred inflation gauge — matched estimates. Consumer sentiment hit a three-month low.

Officials are widely expected to hold rates steady on Wednesday, and traders will focus on any potential change in the central bank’s outlook to incorporate the impacts of the conflict in Iran.

“Despite signs of economic softening, more sticky inflation data simply strengthens the idea that the Fed will remain on the sidelines,” said Ellen Zentner at Morgan Stanley Wealth Management.

Underlying inflation pressures will continue to boil under the surface and next month’s print will also be elevated, impacted by the war in the middle east, according to Jeffrey Roach at LPL Financial.

“We expect the Fed to highlight the uncertainty on both sides of the mandate,” he added. “Inflation will be impacted by the war and unemployment will be impacted by the disruptions in the labor market. Expect to see some important revisions in the upcoming Summary of Economic Projections next week.”

The spike in oil prices and growing concerns around private credit are causing market activity to resemble the lead-up to the global financial crisis, according to Bank of America’s Michael Hartnett.

The strategist flagged how oil doubled to $140 a barrel by August 2008 from $70 in July 2007, accompanied by the start of the “subprime tremors” that engulfed the likes of Northern Rock and Bear Stearns.