US equity markets finished the week with losses after a rising jihadist offensive in Iraq drove oil prices to nine-month highs and stoked further concerns about Middle East stability.
The Dow Jones Industrial Average shed 148.54 points (0.88 percent) over the week, closing at 16,775.74 on Friday, while the broad-market S&P 500 dropped 13.28 (0.68 percent) to 1,936.16.
The NASDAQ declined 10.75 (0.25 percent) to 4,310.65. The losses snapped three straight weeks of gains for equity markets that had translated into fresh records for the Dow and S&P 500.
However, geopolitics returned with force to the market’s radar as Iraq was hit by an insurgent offensive.
On Tuesday, militants spearheaded by the Islamic State of Iraq and the Levant captured Iraq’s second-biggest city of Mosul as part of a multi-pronged assault that by Friday brought the insurgents just 80km away from Baghdad. On Friday, Shiite Grand Ayatollah Ali al-Sistani urged Iraqis to take up arms against the rebels, while US President Barack Obama said he might take military action to support the government, but ruled out sending in ground troops.
US equity markets fell sharply on Thursday, as US oil prices soared more than 2 percent to their highest level since September last year. However, equity markets steadied on Friday, as all three indices finished the day with gains. Oil prices continued to rise, but not nearly as much as they had on Thursday.
“Some of the element of surprise regarding the ease with which the Islamic militants overran Iraqi security forces is wearing off,” Citi Futures energy analyst Tim Evans said.
Investors are now “clearly focused on Iraq rather than ignoring it as they had as recently as Wednesday,” he said.
Opinions varied on the seriousness of the Iraqi situation.
Marblehead Asset Management director Mace Blicksilver described it as “very unsettling.”
“Iraq is a place we forgot about and suddenly we see this unraveling and it has very dramatic implications,” he said.
However, BTIG chief global strategist Dan Greenhaus said US equity markets have been “fantastically resilient” in the face of previous geopolitical scares over Ukraine and Syria.
It is too soon to say if Iraq will be different, he said.
“We’ve had three strong weeks of gains. We’re sitting at close to record highs,” Greenhaus said.
“You obviously don’t go straight up in perpetuity, and this was a week we chose to take break,” he said.
The Iraq story stood out in part because it was a fairly light week as far as economic data.
The US Department of Commerce said retail and food sales last month rose by just 0.3 percent, well below the 0.7 percent increase expected by analysts.
The World Bank trimmed its global growth forecast for this year to 2.8 percent from its January forecast of 3.2 percent, citing in part the sluggish first quarter in the US due to severe winter weather and the Ukraine crisis.
Corporate headlines were dominated by merger news. Tyson Foods won the bidding war for hot dog maker Hillshire Foods after offering US$8.6 billion. Online travel giant Priceline unveiled a US$2.6 billion acquisition of restaurant reservation service OpenTable. And pharmaceutical giant Merck announced a US$3.9 billion takeover of antiviral drug developer Idenix Pharmaceuticals. However, a transaction between Valeant Pharmaceuticals International and Botox-maker Allergan remained far from certain after Allergan rejected the latest bid from the Canadian company.
Corporate stories next week include earnings from FedEx and Oracle, and a mystery announcement from Amazon that analysts say could be the launching of a new smartphone.
Investors will also be awaiting the US Federal Reserve’s conclusion of a two-day policy meeting on Wednesday, accompanied by new economic projections and a news conference with Fed Chair Janet Yellen. The Fed is not expected to alter its measured reduction of stimulus, but analysts will be watching for clues on the time frame for a move to raise the near-zero benchmark interest rate.
NOT JUSTIFIED: The bank’s governor said there would only be a rate cut if inflation falls below 1.5% and economic conditions deteriorate, which have not been detected The central bank yesterday kept its key interest rates unchanged for a fifth consecutive quarter, aligning with market expectations, while slightly lowering its inflation outlook amid signs of cooling price pressures. The move came after the US Federal Reserve held rates steady overnight, despite pressure from US President Donald Trump to cut borrowing costs. Central bank board members unanimously voted to maintain the discount rate at 2 percent, the secured loan rate at 2.375 percent and the overnight lending rate at 4.25 percent. “We consider the policy decision appropriate, although it suggests tightening leaning after factoring in slackening inflation and stable GDP growth,”
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