Key Takeaways:
- Geopolitical tensions escalate, markets drop, oil surges amid uncertainty
- Potential U.S. involvement raises stakes and triggers global concern
- Stablecoin regulation advances with GENIUS Act Senate passage
Markets fell on Tuesday as hostilities ratcheted up between Israel and Iran. The S&P 500 dropped 0.84% and the Nasdaq Composite lost 0.9%. Small-cap stocks were down a full 1%, while the Dow Jones Industrial Average lost 0.7%.
The catalyst for Tuesday’s pullback was the situation between Israel and Iran. Things heated up further as President Donald Trump hinted the U.S. could become involved if Iran doesn’t surrender. In response, Iran’s Supreme Leader Ayatollah Ali Khamenei said his country will not surrender and warned the U.S. against involvement. That news sent oil higher by 4% on the day.
One asset that did respond to the situation in the Middle East was oil. On Tuesday, crude prices jumped 4% to over $73. Increasing oil prices could affect how the Fed approaches interest rate decisions. As I’ve mentioned many times in the past, if there is one thing that can change the inflation equation quickly, it’s oil prices.
Speaking of the Fed, later Wednesday afternoon, the Federal Reserve Open Market Committee will announce its decision on interest rates. We will also get an update to the dot plot, which maps out expectations for interest rates moving forward. Currently, the CME Fed Watch Tool puts the odds of any change to interest rates at almost 0%. I’m not surprised by that given the increase in oil prices and uncertainty surrounding U.S. trade policy and tariffs.
A very positive development on Tuesday was the Senate passing of the GENIUS Act. This legislation provides for some much-needed oversight of stablecoins. Stablecoins are tied to less volatile assets like the U.S. dollar. Crypto assets, such as bitcoin, are in turn pegged to stablecoins. That relationship helps to moderate the volatility of crypto markets. Passage of the GENIUS Act lends both credibility and reliability in the crypto space which will likely lead to greater participation from financial institutions. The House needs to pass the legislation next before it can head to Trump, who has said he would like to sign the legislation into law this summer.
For Wednesday, I’m watching the situation in the Middle East and am interested to hear from Fed Chair Jerome Powell. I’m keeping my eye on both oil prices and the VIX as well. The VIX is back over 21 in premarket trading after having recently gotten back near its historical mean of 16. Also, tomorrow is Juneteenth and U.S. markets will be closed. I expect that to lead to many people taking advantage of the holiday to start a four-day weekend. Therefore, I’m expecting lower volumes on Friday. But I’ll remind everyone that it’s when things are quiet and volume is low that an otherwise innocuous event can cause a big move in the market. As always, I would stick with your investing plan and long-term objectives.
tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.