Middle East War Jitters Weigh On Markets: US Treasuries Hit 5-Month Highs On Worsening Risk Sentiment, Disappointing Data

U.S. Treasury bonds are drawing significant safe-haven demand on Thursday as escalating geopolitical tensions in the Middle East heighten risk aversion among traders seeking liquidity shelters.

The iShares 20+ Year Treasury Bond ETF (TLT) saw a 1% increase, reaching its highest level since March 2024 by 10:45 a.m. in New York. Long-term Treasury bonds are on track for their sixth consecutive session of gains, marking the longest streak since April 2023. Adding to the flight-to-safety sentiment, a trade weighted measure of the U.S. dollar rose.

Concerns over potential conflict in the Middle East between Israel and Iran weighed heavily on market sentiment, reversing Wednesday’s stock market rally driven by Federal Reserve Chair Jerome Powell‘s commitment to a September rate cut.

Economic data released on Thursday indicated cooling labor market conditions ahead of Friday’s jobs report, highlighted by a surge in weekly jobless claims and persistent contraction in manufacturing activity due to employment weakness.

The S&P 500 index, as tracked by the SPDR S&P 500 ETF Trust , fell by 0.8%, following Wednesday’s 1.6% surge.

The economically sensitive small-cap index, monitored through the iShares Russell 2000 ETF (IWM) , dropped by 2.8%, heading for its worst session since April.

Oil prices, as tracked by the United States Oil Fund (USO) , fell 1.2%, following Wednesday’s 4.4% rally.

Geopolitical fears intensify

In the Middle East, the Israeli military announced on Thursday that it had killed Hamas military commander Mohammed Deif in an air raid on Gaza’s Khan Younis on July 13. Deif was considered one of the masterminds behind Hamas’ October 7 attack on southern Israel, which triggered the ongoing conflict in Gaza.

This announcement follows the recent assassinations of Hamas’ political chief Ismail Haniyeh in Tehran and Iran-backed Hezbollah’s leader Fuad Shukr in Beirut.

The Israeli Defense Forces claimed responsibility for the eliminations of Deif and Shukr on social media platform X, while remaining silent on Haniyeh’s assassination.

Israeli Prime Minister Benjamin Netanyahu announced that Israel would respond forcefully to any retaliatory attacks.

The United Nations Security Council convened an emergency meeting a day earlier, requested by Iran, to address Haniyeh‘s killing.

Reuters reported Thursday that top Iranian officials are meeting with regional allies from Lebanon, Iraq, and Yemen to discuss potential retaliation against Israel following the Tehran incident.

Markets Fully Expect 3 Fed Cuts By Year-End

Economic data released on Thursday revealed a higher-than-anticipated increase in weekly jobless claims and a steeper decline in manufacturing activity. Unemployment claims rose by 14,000 to 249,000 for the week ending July 27, exceeding market expectations of 236,000.

The four-week moving average increased to 238,000, reflecting a cooling trend in labor market conditions. Continuing jobless claims surged by 33,000 to 1.88 million for the week ending July 20, surpassing market expectations of 1.86 million and reaching their highest level since November 2021.

The ISM Manufacturing PMI Index fell to 46.8% in July, marking the fourth consecutive month of contraction and the weakest reading since December 2023. This result missed the consensus estimate of 48.8%.

Timothy Fiore, chair of the Institute for Supply Management, commented, “U.S. manufacturing activity entered deeper into contraction. Demand remains subdued as companies hesitate to invest in capital and inventory due to current federal monetary policy and other conditions.”

Interest rate futures indicate growing expectations of Federal Reserve rate cuts, with markets fully anticipating three reductions by year-end, according to the CME Group FedWatch tool.

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