High oil prices wallop U.S. market

NEW YORK — Another climb for oil prices shook stock markets on Friday, as hopes collapsed for a possible cut to interest rates this year by the Federal Reserve.

The S&P 500 fell 1.5 per cent to close its fourth straight losing week, its longest such streak in a year. The Dow Jones Industrial Average dropped 443 points, or one per cent, and the Nasdaq composite tumbled two per cent.

The market’s losses deepened after oil prices erased an early dip and accelerated in the afternoon. Brent crude, the international standard, rose 3.3 per cent to settle at US$112.19 per barrel. Benchmark U.S. crude gained 2.3 per cent to US$98.32 per barrel.

Stocks also bent under the weight of leaping yields in the bond market. Higher yields make mortgage rates and other borrowing more expensive for U.S. households and companies, slowing the economy, and they grind down on prices for all kinds of investments. Treasury yields have been jumping on worries the war with Iran will cause a long-term spike in oil and natural gas prices that drives up inflation.

Worries have gotten so high that traders have cancelled nearly all their bets that the Federal Reserve could cut interest rates this year, according to data from CME Group. Some even think the Fed could raise rates in 2026, a nearly unthinkable scenario before the war began.

“I think it would be market shaking,” Ann Miletti, head of equity investments at Allspring Global Investments, said about a rate hike. But she also said that if oil prices stay high for a long time, they would likely drag so much on the economy that the Fed would not raise rates.

Lower interest rates would give the economy and investment prices a boost, and they’re something President Donald Trump has angrily been calling for. Before the war, traders were betting heavily that the Fed would cut rates at least twice this year.

But lower rates risk worsening inflation. And investors now see little room for central banks worldwide to cut interest rates to help their economies. Besides the Federal Reserve, central banks in Europe, Japan and the United Kingdom also held their interest rates steady this past week.

The price of Brent crude has zigzagged sharply on its way from roughly US$70 per barrel before the war began to as high as US$119.50 this week. Big swings have struck hour to hour as financial markets try to handicap how long the war will last and how much damage it will do to oil and gas production in the Persian Gulf.

The U.S. stock market has a history of bouncing back relatively quickly from past conflicts in the Middle East and elsewhere, as long as oil prices don’t stay too high for too long. Oil prices aren’t at a red-flag point yet, Miletti said, but “we’re getting close if the duration is long enough.”

“If three months from now, we’re in a similar situation, not only myself but a lot of other investors will be much more cautious,” she said. While companies can adjust to gradual rises in oil prices, Miletti said they’re less able to quickly change their business models after a sudden spike becomes a new normal.

On Wall Street, Super Micro Computer lost a third of its value and tumbled 33.3 per cent to help drag the U.S. stock market lower. The U.S. government accused a senior vice-president of the company and two others affiliated with it of conspiring to smuggle billions of dollars of computer servers containing advanced Nvidia chips to China.

The company said it has been co-operating with the investigation and is not a defendant in the indictment. It placed its two accused employees on administrative leave and terminated its relationship with an accused contractor.

Roughly three out of every four stocks in the S&P 500 fell. Stocks of smaller companies, which can feel the pinch of higher interest rates more than their bigger rivals, led the way lower. The Russell 2000 index of smaller stocks fell a market-leading 2.3 per cent.

Among the few winners was FedEx, which rose 0.8 per cent after delivering a much stronger profit for the latest quarter than analysts expected.

All told, the S&P 500 fell 100.01 points to 6,506.48. The Dow Jones Industrial Average dropped 443.96 to 45,577.47, and the Nasdaq composite sank 443.08 to 21,647.61.

In the bond market, the yield on the 10-year Treasury jumped to 4.38 per cent from 4.25 per cent late Thursday and from just 3.97 per cent before the war started. That’s a significant move for the bond market.

The two-year Treasury yield, which more closely tracks expectations for what the Fed will do, leaped to 3.88 per cent from 3.79 per cent late Thursday and is near its highest level since the summer.

When bonds are paying more in interest, they make other investments less attractive in comparison. That’s particularly the case for things like gold, which pay their investors nothing at all. Gold’s price finished the week at US$4,574.90 per ounce, hurting its reputation as a safe place for money during uncertain times. Earlier this year, gold was setting records and briefly topped US$5,400 per ounce.

Outside of Wall Street, stock indexes fell sharply in Europe following their wipeouts on Thursday. Indexes also sank in China, though South Korea’s Kospi added 0.3 per cent.

» The Associated Press