(Aug 12): Wall Street traders refrained from making riskier bets before key inflation data, with stocks falling as the lack of a deal to restore energy flows through the Strait of Hormuz lifted oil prices.
US crude settled near US$83 as Iran reiterated plans to keep the waterway shut until its demands are met. Oil had earlier dropped after Pakistan signaled optimism about some sort of arrangement over Hormuz. The S&P 500 extended its retreat from record highs. Treasuries edged up ahead of a report that’s expected to show moderation in consumer prices.
Iranian officials have signaled that Tehran and Oman may be nearing an agreement, but it remains unclear whether such a deal would lead to an immediate and full reopening of the strait.
President Donald Trump has recently toughened his stance, saying Tehran should pay reparations for those killed in attacks linked to the Islamic Republic and in domestic protests. His comments came in response to a series of demands laid out by Iran, including compensation for US violations of an interim peace deal.
“Investors have been awaiting a deal for a few weeks, and tangible progress is likely required for yields to fall significantly and stocks to rally further at this juncture,” said Jose Torres at Interactive Brokers.
“We see crude oil prices driving the war narrative, with price swings likely to dictate the pace of escalation and de-escalation,” said Elias Haddad at Brown Brothers Harriman & Co.
Wednesday’s consumer price index is likely to show a cooling of energy-related pressures that had intensified in the months immediately following the start of the war. That may help alleviate some of the anxiety at the Federal Reserve after three officials dissented in July in favor of raising rates.
“I expect the CPI report to continue its downward trend which will further support the case for the Federal Reserve to hold rates steady rather than hiking them, even with last Friday’s weak jobs report,” said Dennis Follmer at Montis Financial.
Data Tuesday showed sales of existing homes fell to a three-month low in July as elevated prices and mortgage rates continued to weigh on the housing market. Meantime, small-business optimism rose to the highest in almost a year as firms ramped up hiring plans and inflation pressures eased.
“A resolution to the Middle East conflict could provide an additional boost to sentiment,” said Jeffrey Roach at LPL Financial. “One particularly encouraging observation from the report’s summary was the reminder that ‘the world has plenty of oil.’ Economic conditions are favorable for risk appetite.”
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