Major indices ended lower yesterday amid escalating US-Iran tensions (including oil price surges to six-month highs), a selloff in financials/private equity stocks, and ongoing concerns over AI investment risks and spending. Rising US-Iran tensions (e.g., Trump’s deadline comments on nuclear talks) are weighing on risk sentiment, boosting oil but pressuring stocks.
A surge in oil prices triggered by an outbreak of war would generally be expected to push inflation higher, which is typically negative for stocks overall. This would be challenging for Japan and the carry trade as Japanese yields / rates would rise. The classic yen carry trade involves borrowing cheaply in yen (low BOJ rates) to invest in higher-yielding assets abroad (US stocks). Rising Japanese yields/rates narrow the interest rate differential with the US, forces leveraged positions to cover (sell US assets, buy yen to repay loans). If the oil price continues to rally US stocks will decline.
An attack on Iran is becoming high probability judging by the recent comments from president Trump. Furthermore the focus today is on two major economic reports that could influence inflation. US GDP at 1.30pm is expected to come in around 3.0%, a deceleration from Q3’s 4.4%. This report is particularly significant as it accounts for the impact of the record 43-day government shutdown earlier this year. PCE Price Index at 1.30pm is the Fed’s inflation gauge. Investors are looking for signs that inflation is sustainably heading toward the 2% target after the Fed held rates steady in January.