Dow, S&P 500, Nasdaq resume sell-off, oil surges as Middle East conflict escalates

One glaring market reaction to the war headlines has been the sell-off in US government long-term bonds, pushing yields like the 10-year (^TNX) and 30-year (^TNY) yields materially higher.

In other words, there has been a classic flight to safety into long-dated Treasurys, and recent weak demand at Treasury auctions has reinforced that point.

Part of the move reflects rising inflation fears as energy prices surge. Inflation expectations embedded in the bond market (so-called breakevens) have moved higher, but so have real yields — a sign investors are also demanding more compensation to own long-term debt beyond only expected inflation. The Street increasingly sees higher term premiums, heavy Treasury supply, and hesitant demand as part of the story.

Another piece is positioning. Traders have flipped to betting against Treasurys as the war drags on, after big positions were unwound in Treasury futures last week. That fits with the broader worry that crowded fixed-income trades, including the Treasury basis trade, can amplify moves when volatility jumps.

Strip away the bond-market jargon, and the takeaway is simple: The 30-year yield is again nearing the big 5% level. That area has rattled stocks several times in recent years, even if those spikes did not last.

What markets still have not really tested is a sustained, disorderly move above 5% — the kind that could force investors to sell whatever they can to meet margin calls, not just what they want to.

Twenty-four hours after the International Energy Agency (IEA) announced a 400 million-barrel release from the Group of Seven nations’ strategic petroleum reserves, oil prices have surged into the upper $90s per barrel once again.

Futures on Brent crude (BZ=F), the international benchmark, gained 6% to trade around $94.70 after briefly crossing $100 per barrel in overnight trading. Those on the US benchmark West Texas Intermediate (WTI) crude (CL=F) picked up 7% to change hands above $93.40.

Given the continued market disruption, Goldman Sachs’ commodities desk raised its price targets Wednesday night for a third time since the start of the war in Iran. The bank now estimates fourth quarter prices on Brent and WTI at $76/ barrel and $72/barrel, respectively, assuming a 30-day disruption, and prices at $93/barrel and $89/barrel under a 60-day disruption.

A day ago, Goldman predicted Brent and WTI prices of $71/barrel and $67/barrel, respectively, in the fourth quarter.

Multiple tankers and other vessels were struck in and around the Strait of Hormuz throughout Wednesday and Thursday, bringing the tally of vessels attacked since the start of the war to at least 16. Iran has increasingly targeted ports and other key infrastructure throughout the region, even as explosions at its own fuel depots have covered Tehran in black clouds of oil-soaked air.

In a monthly report on the state of the energy market published Thursday morning, the IEA said the war in Iran is “creating the largest supply disruption in the history of the global oil market,” noting that 7.5% of global supply has now been disrupted.

Initial jobless claims held steady from the previous week, undershooting economist estimates.

Data released by the Labor Department showed that 213,000 people filed initial jobless claims in the week ended Mar. 7, coming in below economists’ expectations of 215,000 initial claims.

Continuing claims for the week ended Feb. 21 totaled 1.85 million, above consensus estimates of 1.84 million and below the previous week’s 1.87 million continuing claims.

This week’s jobless claims come after the Labor Department’s February jobs report, published March 6, showed that the US lost 92,000 jobs for the month, far below estimates of 55,000 jobs added.

“You have to separate a pretty strong labor market with very weak hiring — they are two different things,” ADP chief economist Nela Richardson said on Bloomberg TV after the initial claims report was released.

Petco (WOOF) stock rose 7% during premarket hours on Thursday after the company reported sales in line with analysts’ estimates on Wednesday.

Travel stocks edged lower on Thursday before the bell, with Southwest Airlines (LUV), Carnival Cruiseline (CCL), and American Airlines (AAL) all falling roughly around 2%. Travel stocks have been impacted by the Iran war, as oil prices rise due to the blockage of the Strait of Hormuz, causing many analysts to state that fuel costs of airlines and cruise operators will also increase.

Honda (HMC) stock fell 7% before the bell today after a report on Thursday stated that the automaker expects to lose $15 billion due to scrapping its electric vehicle models.