By Lewis Krauskopf and Naomi Rovnick
NEW YORK/LONDON (Reuters) – U.S. stocks sold off sharply on Friday as the dollar surged as investors grappled with growing geopolitical tensions and persistent inflation that could lead to a divergence in monetary policy between the United States. United and Europe.
MSCI’s index of stocks across the world last fell 1.2%, its biggest one-day decline in about six months, dragged down by the U.S. performance.
Wall Street’s major indexes all fell more than 1%, with the S&P 500 posting its biggest one-day decline since Jan. 31, as the first-quarter earnings season began on a gloomy note with reports from big banks.
“We face a mix of elevated geopolitical risk, inflation concerns and mild (earnings) disappointments,” said Angelo Kourkafas, senior investment strategist at Edward Jones.
Fears that Iran could retaliate for an airstrike on its embassy in Damascus that it blames on Israel are hovering over markets, supporting oil and prompting a turn to gold and other safe-haven assets. Israel has not claimed responsibility for the April 1 airstrike.
US President Joe Biden said on Friday he expected Iran to attack Israel “sooner rather than later” and warned Tehran not to pursue it.
There are “concerns about a possible attack by Iran on Israel,” said Kristina Hooper, chief global markets strategist at Invesco. “Geopolitical risk is driving a lot of these movements.”
The outlook for central banks was also in focus. The European Central Bank signaled Thursday it could begin cutting rates, while a higher-than-expected inflation reading on Wednesday pushed back bets on a first Federal Reserve cut to later in the year.
The dollar index gained 0.69% and reached its highest level in more than five months. The euro was down 0.76%.
“We have a power play of the dollar and U.S. interest rates, that’s what’s happening here,” said Joseph Trevisani, senior analyst at FX Street in New York.
The Japanese yen bucked the trend, strengthening 0.02% against the dollar in a rebound after hitting a 34-year low during the day as investors watched for signs of intervention Tokyo authorities.
On Wall Street, the Dow Jones Industrial Average fell 475.84 points, or 1.24%, to 37,983.24, the S&P 500 lost 75.65 points, or 1.46%, to 5,123.41 and the Nasdaq Composite fell 267.10 points, or 1.62%, to 16,175.09.
Investors digested the results from JP Morgan, Citigroup and Wells Fargo, with the S&P 500 Banks index down 3.3%.
The European STOXX 600 index increased by 0.14%.
The yield on U.S. benchmark 10-year bonds fell 5.9 basis points to 4.518%, from 4.576% late Thursday. Federal Reserve Bank of Boston President Susan Collins is considering some interest rate cuts this year, knowing it will still take some time to bring inflation back to target levels.
Market pricing implies that investors expect the Fed to cut its main interest rate by around 48 basis points this year, after traders began betting on cuts of around 150 basis points. base in 2024.
Oil prices have risen due to tensions in the Middle East.
US crude rose 0.75% to $85.66 per barrel and Brent settled at $90.45 per barrel, up 0.79% on the day.
Spot gold lost 1.24% to $2,343.76 an ounce, taking a breather after surging above $2,400 an ounce to hit an all-time high.
(Reporting by Lewis Krauskopf and Chuck Mikolajczak in New York, Naomi Rovnick and Kevin Buckland; editing by David Holmes, Alison Williams, Ros Russell and Richard Chang)
