Markets retreat as Middle East tensions escalate

Market Commentary

US equities retreated from record highs on Wednesday as renewed escalation in the Middle East weighed on investor sentiment and reinforced concerns about inflation and interest rates. The S&P 500 fell 0.70%, while the Nasdaq 100 declined 0.90% and the Dow Jones Industrial Average dropped 619 points. Rising oil prices, following further exchanges between the US and Iran and continued disruption to regional energy exports, pushed bond yields higher and added to expectations that monetary policy could remain restrictive for longer. Technology shares came under pressure, with Oracle and Palantir falling more than 5%, while Microsoft lost 3%. Broadcom declined 8% in after-hours trading after missing revenue expectations and issuing weaker-than-expected guidance.

Against this backdrop, the US dollar index strengthened to 99.4, its highest level in around two months, supported by stronger-than-expected labour market data and safe-haven demand. The ADP employment report showed private-sector job creation of 122 000 in May, while earlier JOLTS data indicated job openings had reached their highest level since November 2024. The yield on the US 10-year Treasury note rose to 4.49%, with markets now pricing in an 85% probability of a quarter-point Federal Reserve rate hike by year-end.

European equities also closed lower as investors assessed the inflationary implications of higher energy prices and renewed trade tensions. The Euro STOXX 50 fell 0.70%, while the STOXX Europe 600 declined 0.50%. Banks led the losses, with UniCredit, BBVA and Deutsche Bank falling between 2% and 3.70%, while LVMH slipped 3%. In contrast, ASML gained 1.60% and Inditex rose 1.50% following strong earnings results.

Asian markets delivered a mixed performance. Chinese equities extended gains, supported by strength in semiconductor and technology shares, while Japan’s Nikkei 225 advanced more than 2% to a fresh record high above 68 000. Technology-related stocks led the gains, with Tokyo Electron surging 13.40% and Advantest rising 5.10%.

Locally, the rand eased to around R16.30 against the US dollar as a stronger greenback and weaker precious metal prices weighed on sentiment. South Africa’s S&P Global PMI fell to 49.6 in May from 51.6 previously, reflecting weaker output and new orders, while rising fuel costs pushed input price inflation to its highest level since July 2022.

Commodity markets remained focused on developments in the Middle East. Brent crude traded below $97 a barrel after three consecutive sessions of gains, while gold fell to around $4 450 per ounce. Silver traded near $73 an ounce and platinum remained around $1 880 as expectations of tighter monetary policy continued to weigh on precious metals.