Market Wrap US-Europe 7 July: Wall Street and Europe Fall as Hormuz Tensions Return and Technology Leads Lower

US and European equities fell on Tuesday as the return of geopolitical tensions around the Strait of Hormuz hit risk appetite, with technology shares leading Wall Street lower while oil, bond yields and volatility rose in a broadly risk-off session.

In the United States, the technology-heavy Nasdaq Composite was the weakest of the majors, dropping 1.16 percent to 25,818.69, while the S&P 500 fell 0.45 percent to 7,503.85 and the Dow Jones Industrial Average eased 0.25 percent to 52,925.15. The session had a distinctly defensive shape, with the Nasdaq underperforming the blue-chip Dow by 0.91 percentage points at the close, our calculation, as investors rotated away from the technology names that have led this year’s advance.

Europe closed lower too. Germany’s DAX was the weakest major benchmark, falling 1.37 percent to 25,465.25, while the Euro Stoxx 50 dropped 1.22 percent to 6,319.86 and France’s CAC 40 fell 0.51 percent to 8,436.24, finishing at its session low, a close confirmed at index operator Euronext. The UK’s FTSE 100 was the only major gainer on either side of the Atlantic, edging up 0.13 percent to 10,665.88, helped by its heavy weighting in energy shares as crude prices jumped.

The driver was geopolitical. Attacks on tankers near the Strait of Hormuz, the waterway that carries roughly a fifth of the world’s oil, sent crude sharply higher, with Brent up 3.07 percent to 74.20 dollars a barrel, and the United States revoked the general license that had authorised sales of Iranian oil, a US official told CNBC.

The transatlantic split was modest but consistent. The three US benchmarks fell by a simple average of 0.62 percent, our calculation, while the four European benchmarks fell by an average of 0.74 percent, our calculation. Dispersion was wider in Europe, where 1.50 percentage points separated the FTSE 100’s gain from the DAX’s loss, than in the US, where 0.91 percentage points separated the Dow from the Nasdaq, our calculation.

The New York and European sessions completed a global trading day that had already turned defensive in Asia, where a technology-led selloff dragged South Korea’s KOSPI down 4.91 percent and Japan’s Nikkei 225 down 2.12 percent. Gulf markets, by contrast, held firm earlier on Tuesday: Egypt’s EGX 30 rallied 0.96 percent, Saudi Arabia’s TASI added 0.36 percent, Abu Dhabi gained 0.19 percent and Kuwait’s All Share Index was little changed, as higher oil cushioned the region against the global risk-off move.

In rates, foreign exchange and crypto, the tone was defensive at the close. The US 10-year Treasury yield rose 6.6 basis points to 4.545 percent, our calculation, and the VIX volatility index climbed 3.66 percent to 16.14. Tellingly, yields rose rather than fell, making this less a classic flight to safety than an inflationary geopolitical shock, as the jump in oil lifted inflation concern even as equities sold off. The dollar strengthened modestly against the European majors, with the euro easing 0.21 percent to 1.1416 and sterling 0.24 percent to 1.3358, while the yen was steady at 162.04 per dollar. The Egyptian pound held near 48.76 per dollar and the Kuwaiti dinar was unchanged at 0.3076. Bitcoin edged up 0.19 percent to 63,803.

Why it matters: Tuesday’s session showed how quickly a geopolitical shock can reset market sentiment, with equities selling off while oil, volatility and bond yields all rose, a pattern that points to an inflationary energy shock rather than a classic flight to safety, and with the equity weakness concentrated in the technology names that carry the market’s leadership. For MENA, the transmission is double-edged: higher oil supports the export revenue of Gulf producers, and Gulf equities outperformed global peers on Tuesday, but the source of the move, renewed insecurity around the Strait of Hormuz, is a direct threat to the region’s most important export route, and the accompanying rise in the dollar and Treasury yields tightens external conditions that reach the Gulf through the currency pegs.

Outlook: The near-term drivers are the security situation in the Strait of Hormuz and the path of oil, including whether Brent holds above 74 dollars a barrel and whether tanker traffic and insurance costs in the Gulf normalise or escalate. How Gulf markets open on Wednesday, 8 July, will show whether the region’s resilience extends into the new session, while for Wall Street the question is whether the technology-led selloff stabilises ahead of June US inflation data and the start of the second-quarter earnings season.

US and Europe equities, ranked highest to lowest

MENA and Asia equities, ranked highest to lowest (7 July close, reference)

Rates, FX and crypto

Sources: Nasdaq; New York Stock Exchange; Deutsche Boerse; London Stock Exchange; Euronext; CNBC.

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