US stocks traded cautiously on Friday, with the S&P 500 ending down 0.17% at 7,785.76 points and the Nasdaq declining 0.28% to 26,729.16 points as investors monitored tense US-Iran talks and digested new economic data. The Dow Jones Industrial Average fell 0.20% to 53,732.41 points, with chipmakers including Applied Materials, Broadcom and Intel leading the decline. According to Reuters, "A lot of the drivers in the market right now are around various parts of AI," said Thomas Martin, senior portfolio manager at GLOBALT Investments. European shares finished lower on Friday and snapped a four-week winning streak, as rising crude prices and renewed geopolitical tensions offset support from a resilient earnings season. MSCI's gauge of stocks across the globe fell 0.79 points to 1,160.01, while MSCI's broadest index of Asia-Pacific shares outside Japan closed 0.29% higher at 1,640.08.
The subdued market performance reflects escalating concerns about Iran tensions and potential US-Iran resolution prospects. As reported by Reuters, US President Donald Trump rejected Iran's demand for war reparations and said he would allow economic pressure on the country to build, while Iranian Foreign Minister Abbas Araghchi said there was "no possibility of restarting negotiations" under current conditions. This hardened stance represents a significant escalation from previous reports of potential deals with Oman, with Tehran continuing to resist direct negotiations with the US until several conditions are met. US consumer sentiment deteriorated in early August amid the rising cost of living because of the Middle East conflict, according to a survey released on Friday. Washington and Tehran have instead drifted into what increasingly resembles a geopolitical game of economic chicken, with both sides apparently convinced the other has more reason to grab the diplomatic steering wheel first. "Currently, the geopolitical uncertainty remains the only major macro roadblock to a market experiencing strong tailwinds from earnings and the monetary policy outlook," noted Capital.com strategist Kyle Rodda.
Brent crude oil futures settled at $88.52 a barrel, up 1.67%, while US futures finished at $82.40, up 1.42%, as traders weighed signs that the US and Iran could be moving closer to an arrangement over the Strait of Hormuz. Faltering talks to end the Iran war left oil and gas prices poised for sizeable weekly gains, with faltering talks to end the Iran war leaving oil and gas prices poised for sizeable weekly gains. The U.S. threatened to ramp up economic pressure on Iran, including extending a naval blockade, according to Reuters. Pakistan's Defence Minister Khawaja Asif said "Washington and Tehran were 'close to some sort of arrangement' over Hormuz, adding that 'things are shaping up in favor of peace.'" Pakistan has been mediating efforts to end the conflict. Talks between Iran and Oman over Hormuz have also reached an advanced stage, according to Al Jazeera citing a Qatari foreign ministry spokesperson. A US Navy helicopter fired two Hellfire missiles at a Panama-flagged cargo vessel attempting to breach a blockade of Iranian ports, demonstrating the ongoing military enforcement of the blockade.
Market expectations for Federal Reserve policy have shifted following recent economic data, with recent rise in oil prices pushing markets to price back a nearly 50% chance of a rate hike in September, according to data compiled by Bloomberg. Traders now price in a 52% chance of a rate hike in September, down from previous expectations. As reported by Reuters, the data further reduced expectations of a Federal Reserve rate hike at next month's meeting. The U.S. dollar fell on a surprise drop in U.S. retail sales, supporting gold prices, with the dollar index falling 0.28% to 99.65. The yield on benchmark U.S. 10-year notes rose 4.72 basis points to 4.688%. "For now, markets appear willing to tolerate a significant amount of uncertainty without demanding higher risk premiums. However, this equilibrium is unlikely to be permanent," noted John Sidawi, senior portfolio manager for fixed income at Federated Hermes. "A meaningful escalation in conflict or a clear path toward resolution could finally force investors off the sidelines, potentially triggering a much larger volatility response than current market pricing implies."
The oil market faces significant supply disruptions despite ongoing negotiations, with the disruption pushing crude more than 40% higher this year. Product prices have risen further, with diesel also affected by supply disruptions linked to the Russia-Ukraine war. The American Petroleum Institute reported that US crude stocks increased by 9.1 million barrels last week, according to a document seen by Bloomberg, which would be the largest weekly increase since February if confirmed by official data. The US Energy Information Administration expects oil supply disruptions linked to the Iran conflict to reach about 600,000 barrels a day through the end of 2027. The International Energy Agency and OPEC are also due to release their monthly market reports on Wednesday, offering fresh estimates on global oil supply and demand that could further influence market sentiment. John Sidawi, senior portfolio manager for fixed income at Federated Hermes, noted a puzzling feature of markets in recent months has been the growing disconnect between geopolitical uncertainty and asset price volatility.
