Stock index futures were down sharply Friday, but off their intraday lows, after a U.S. airstrike in Baghdad killed a top Iranian military commander and stoked fears of an escalating conflict in the Middle East.
What’s driving the market?
Futures on the Dow Jones Industrial Average YMH20, -0.87% dropped 239 points, or 0.8%, to 28,603, while S&P 500 futures ESH20, -0.97% declined 31.75 points, or 1% to 3,227.25. Nasdaq-100 futures NQH20, -1.11% were off 103.75 points, or 1.2%, at 8,788.
See: Oil prices skyrocket, stock futures sink after top Iranian general killed by U.S. airstrike
The investor flight from risky assets toward traditional safe 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 to end the first trading session of 2020 at records.
The Dow DJIA, +1.16% on Thursday advanced 330.36 points, or 1.2%, to end at 28,868.80, while the S&P 500 SPX, +0.84% rose 27.07 points, or 0.8%, to close at 3,257.85. The Nasdaq Composite COMP, +1.33% jumped 119.58 points, or 1.3%, to end at 9,092.19.
What’s driving the market?
The Pentagon confirmed late Thursday that the U.S. military had killed Qasem 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.” The prospect of sharp retaliation by Iran could keep market participants unnerved in the coming days and weeks.
“We know that this is an escalation of tension in the region. 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.”
Chiavarone said investors shouldn’t over-react to the flare-up in geopolitical jitters unless it delivered a material dent to the global economy’s progress. More important to the bull market’s momentum was the direction of economic growth, how much stimulus central banks provided, and if trade tensions continued to subside with the forging of the phase one tariff deal, said Chiavarone.
Read: Iran vows ‘harsh’ response to killing of top general as U.S. tells citizens to leave Iraq
Oil futures jumped, with global benchmark Brent crude for March delivery BRNH20, +3.70% and U.S. benchmark West Texas Intermediate crude for February delivery CLG20, +3.55% both up around 4%.
Need to Know: Why oil could hit $80 even without a ‘full-blown’ U.S.-Iran war
Haven-related buying was credited with pushing gold futures GCG20, +1.31% up by 1.3%. The yield on the 10-year U.S. Treasury note TMUBMUSD10Y, -2.79% dropped 5.4 basis points to 1.83%.
Which stocks were in focus?
The surge in oil prices sent airline stocks lower in premarket trading as higher fuel costs could crimp their earnings. Shares of American Airlines Group Inc. AAL, +1.43% fell 2.5%, Delta Air Lines Inc. DAL, +0.96% dropped 2.4%, and United Airlines Holdings Inc. UAL, +1.87% shed 1.9%.
On the other hand, shares of U.S. energy companies were on the rise. Analysts have noted the U.S. economy could benefit from higher crude values because it is now a large oil exporter. The SPDR Energy Select Sector ETF XLE, +0.90% rose 2.1%. Shares of Exxon Mobil Corp. XOM, +1.61% gained 1.3%, Occidental Petroleum Corp. OXY, +3.32% hiked up 3% and Marathon Oil Corp MRO, +0.74% rallied 3.7%.
What’s on the economic calendar?
The reaction to the Iran news threatened to overshadow U.S. economic data, including the release later Friday of the Institute for Supply Management’s closely watched December U.S. manufacturing purchasing managers index. Economists surveyed by MarketWatch, on average, expect the index, due for release at 10 a.m. Eastern, to rise to 48.8% from a reading of 48.1% in November, which would still leave the gauge in contraction territory.
“This may be the last ISM reading investors will pay attention to in a while. The Boeing shutdown is going to wreak havoc on the data. I’m not sure anybody is going to care as there is a built-in excuse to disregard future numbers,” said Chiavarone.
Separately, government data on U.S. November construction activity is also due at 10 a.m. Eastern, while minutes of the Federal Reserve’s December meeting are set for release at 2 p.m. Eastern.
Investors are also due to hear from a number of Federal Reserve officials, including Fed Gov. Lael Brainard, San Francisco Fed President Mary Daly, Chicago Fed President Charles Evans and Dallas Fed President Robert Kaplan, who are attending an economic conference in San Diego.
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