Why stocks are up and oil is down as the US and Iran trade strikes
Traders expected lower stocks and higher oil after the initial attack. The opposite has happened.
This is because Iran's response was seen as less aggressive than some expected.
Investors were bracing for a wild day of trading on Monday after the US bombed Iran on Sunday. What transpired was volatile, but not in the way traders expected.
The traditional risk-off response to the US attack on Iran would've amounted to selling in stocks and a spike in oil prices. That's initially what happened in overnight trading.
But in the morning, shortly before the US equity market opened, stocks started coming back. Oil prices pared earlier losses as well.
Those moves extended as the day progressed, especially in the afternoon when Iran announced retaliatory measures. The strikes on a US air base in Qatar were viewed as a half-measure that actually calmed nerves, at least somewhat.
"Iran responded to the US attack because Iran needed to respond, not necessarily because they wanted to respond, and potentially have their country hit once again with US bombs, without any realistic ability to trade punches," Lou Brien, economic strategist at DWR Holdings, said in a client note.
Brien described the response as "a matter of saving face, not a matter of going toe-to-toe."
It's also possible that President Donald Trump's plea for oil prices to stay low helped spur the downward move in the commodity.
Here's where the major market moves stood as of the 4 p.m. stock-market close in New York:
S&P 500: 6,025.17, up 1%
Dow Jones Industrial Average: 42,581.78, up 0.9%
Crude oil: $68.63, down 7%
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"There wasn't much in the way of escalation so markets breathed a sigh of relief," Paul Hickey, cofounder of Bespoke Investment Group, told Business Insider. "But we were also trading sideways for the two weeks leading up to the event, and I don't think it was ever considered a major concern."
After Iran's limited retaliatory strikes, further options appear limited. The country relies on oil revenue from the Strait and may not want to anger additional oil-exporting neighbors, and has fewer proxies and allies willing or able to help than in the past.
Investors have also been pricing in geopolitical risks for months, especially given the Israel-Hamas conflict and Israel's recent attacks on Iranian military leaders and Tehran's proxies such as Hezbollah.
However, Trump has raised the prospect of "regime change" and suggested further strikes aren't off the table, meaning the possibility of escalation remains.
The president's tariffs have already muddied the outlook for global growth, and the renewed possibility of America getting roped into a military campaign in the Middle East once again gives investors plenty to chew over. Disruptions to the global oil supply could fuel inflation and curb growth, meaning the economic stakes are high for much of the world.
"The situation is evolving rapidly, and the ultimate consequences remain uncertain, requiring investors to stay alert as new developments arise," Hakan Kaya, senior portfolio manager at Neuberger Berman, said in a morning note.
It's clear a negative market panic hasn't taken hold as yet, but the US strikes have created a dust cloud of uncertainty and raised additional risks to market watchers.
Read the original article on Business Insider
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