U.S. stocks retreated from their records Tuesday after Iran fired missiles into Israel, a sharp escalation of tensions in the Middle East that investors fear could lead to disruptions in the flow of oil.
The S&P 500 pulled 0.9% lower and the Dow Jones Industrial Average lost 0.4% after both had set all-time highs the day before. The Nasdaq composite dropped 1.5% after paring a bigger loss from earlier in the day, like other indexes.
The S&P/TSX Composite Index was able to close slightly higher - enough for a record high - with the Canadian benchmark benefiting from higher oil and gold prices.
Crude prices jumped amid speculation about how Israel and the United States may respond to Iran’s move. While Israel is not a major producer of oil, Iran is, and the potential for a wider conflict could affect other, neighbouring producers of crude. The price for a barrel of benchmark U.S. crude rose 2.4% to settle at US$69.83.
That in turn sent shares of oil-and-gas producers to some of Wall Street’s biggest gains. ConocoPhillips rose 3.9%, and Exxon Mobil climbed 2.3%.
Shares of defence contractors also rallied. Northrop Grumman rose 3%, and RTX added 2.7%. RTX partners with Israeli company Rafael Advanced Defense Systems to make the “Iron Dome” air defense system that Israel’s government uses.
The majority of U.S. stocks, though, sank. The two biggest stocks in the market, Apple and Microsoft, both fell at least 2.2%, while the smallest U.S. stocks that make up the Russell 2000 index dropped 1.5%.
“Stocks are vulnerable as we are at all-time highs, and valuations are stretched prior to the election,” said Jay Hatfield, CEO at Infrastructure Capital Advisors.
The S&P/TSX composite index ended up 33.62 points, or 0.1%, at 24,033.99, slightly eclipsing the record closing high it posted on Thursday.
The TSX’s energy sector climbed 3.4%. Gold, a traditional safe haven, also rose, helping to lift metal mining shares. The materials sector added 1%. All the other major sectors lost ground, with technology falling 1.6% and industrials ending 0.8% lower.
In domestic economic news, lower borrowing costs boosted domestic manufacturing activity in September. The S&P Global Canada Manufacturing Purchasing Managers’ Index increased to 50.4 from 49.5 in August, its first move above the 50.0 no-change mark since April 2023.
U.S. and Canadian stocks had been jumping on hopes the U.S. economy can continue to grow despite a slowdown in the job market, as the Federal Reserve cuts interest rates to give it more juice. The Fed last month lowered its main interest rate for the first time in more than four years, and it’s indicated it will deliver more cuts through next year.
The dominant question hanging over Wall Street is whether the cuts will ultimately prove to be too little, too late after the Fed earlier kept rates at a two-decade high in hopes of braking on the economy enough to stamp out high inflation.
A discouraging report arrived Tuesday, showing U.S. manufacturing weakened by more in September than economists expected. Manufacturing has been one of the areas of the economy hurt most by high interest rates, and the report from the Institute for Supply Management said demand continues to slow.
A separate report was potentially more encouraging. It showed U.S. employers were advertising more than 8 million job openings at the end of August. That was slightly more than July’s number and better than what economists were expecting. A more comprehensive report on hiring will arrive on Friday, when the U.S. government details how many jobs U.S. employers created in September.
Besides the job market, another threat to the economy could lie in the strike by dockworkers at 36 ports across the eastern United States. It could snarl supply chains and drive up inflation if it lasts a while.
The workers are asking for a labour contract that doesn’t allow automation to take their jobs, among other things. So far, financial markets have taken the strike in stride. Supply chain experts say consumers won’t see an immediate impact from the strike because most retailers stocked up on goods, moving ahead shipments of holiday gift items.
In the bond market, the yield on the 10-year Treasury fell to 3.73% from 3.79% late Monday. Yields fell after worries about the Middle East drove investors into Treasuries, gold and other investments seen as safer.
Yields had already been easing worldwide beforehand, following an encouraging update on inflation from Europe. Inflation among the 20 countries that use the euro currency came in below 2% in September, the first time that’s happened in more than three years. The slowdown could give the European Central Bank leeway to cut interest rates more quickly.
European stocks indexes initially swung higher following the inflation update, only to fall to losses. Indexes dropped 0.8% in France and 0.6% in Germany.
Farther east, a quarterly “tankan” survey by the Bank of Japan showed more large manufacturers are still feeling optimistic about business conditions than pessimistic. Japan also reported that its unemployment rate for August fell to 2.5% from 2.7% in July, in line with market expectations.
Japan’s benchmark Nikkei 225 rallied 1.9% to claw back some of its steep 4.8% loss from the day before.
Markets in China and South Korea were shut for holidays. Mainland Chinese markets, which had their best day since 2008 on Monday, will remain closed until Oct. 7 for the National Day break.
The Associated Press, Reuters, Globe staff