Oil, Treasurys and Gold Surge as Investors Seek Havens
Prospects of International Military Action in Syria Rattle Markets
The prospect of a U.S. military strike against Syria rattled global financial markets Tuesday, with investors selling shares and bidding up the prices of crude oil, gold and government bonds in an effort to reduce risk.
The Dow Jones Industrial Average shed 158 points, or 1%, to 14788 in midafternoon trading. The S&P 500 stock index was down 1.5% to 1632. Oil futures rose about 3% and gold 2%, while the yield on the 10-year U.S. Treasury note tumbled to 2.722%. Emerging-market currencies fell, adding to a recent selloff amid concerns about the pace of central-bank stimulus.
Tuesday's tumult came as the Arab League said Syria had used chemical weapons against its population. The U.S. Defense Department has presented military options to President Barack Obama, and defense officials have said the U.S. is considering cruise-missile strikes from Navy ships in the Mediterranean.
The broad retreat underscores the hefty psychological impact of turmoil in the Middle East at a time of broad uncertainty over asset prices. The move echoed the stock-market pullback that accompanied the bombing campaign in Libya in 2011 and the U.S. invasion of Iraq in 2003.
"Markets don't like these kinds of big events that are unforeseen," said Mark Sorgenfrei, vice president for Waddell & Associates, which oversees about $700 million in Memphis, Tenn. "Any time there's disruption from a military standpoint, markets worry about how that's going to have a spillover effect, especially in an area as volatile as the Middle East and especially an area that has as much impact on the energy markets."
The action followed a slump in Middle East stocks. Dubai's main DFM General Index sank 7%, while Saudi Arabia's Tadawul Index closed 4.1% lower.
Gold prices rose 2% to a three-month high of $1,420.60 a troy ounce. Benchmark 10-year Treasurys were up increased by 23/32 in price, the third consecutive day of higher prices.
In the U.S., financial and industrial stocks were the weakest sectors, while utilities edged higher. Within the Dow, Microsoft MSFT -2.61% fell 2.6% and Bank of America BAC -2.62% lost 2.4% to pace declines in 29 of 30 components.
Emerging-market currencies fell sharply, particularly for countries with current-account deficits, which are likely to be hardest hit by higher oil prices. The Turkish lira slid 2.2% to a record low of 2.0407 per dollar Tuesday. The Indian rupee, meanwhile, dived 3.6% to 66.63 a dollar, after hitting a record low earlier in the session. Both countries are net importers of oil.
The prospect of U.S. intervention overseas has knocked markets off-kilter in the past.
"The problem with events like this is they're very hard to handicap," said Russ Koesterich, chief market strategist at BlackRock Inc., BLK -3.92% which oversees about $3.8 trillion. "I don't know anyone that has a good feeling for what's going to happen on the ground in Syria ... so the knee-jerk reaction is to back off a bit."
Among concerns surrounding a wider Syrian conflict is its potential impact on oil prices. Brent crude for October delivery rose $3.55, or 3.2%, to a six-month high of $114.28 a barrel on the ICE Futures Europe exchange Tuesday. Crude-oil futures on the New York Mercantile Exchange gained $3.09 a barrel, or 2.9%, to $109.01, their highest in 18 months.
Syria itself isn't a major oil producer, but analysts say there remains the possibility of a wider regional conflict, particularly given the recent turmoil in Egypt and sectarian fighting in Iraq.
Investors are also wary because oil prices are already so high. When the U.S. invaded Iraq in 2003, oil was costing less than $40 a barrel. Today, crude commands nearly $110 a barrel in the U.S.
Economists worry about high oil prices because they translate into higher costs and reduced spending throughout the economy. Ethan Harris, co-head of global economics at Bank of America, estimates that every $10-a-barrel rise in oil prices correlates with a roughly quarter-percentage-point reduction in gross-domestic-product growth over the course of a year. Oil prices have risen more than $12 since the start of July.
The increase in crude prices is worrisome following other recent data that suggest the U.S. recovery remains on shaky footing. This week, investors were dealt weaker-than-expected readings on orders for durable goods and new home sales in the U.S., noted Mr. Harris.
These factors could give the Federal Reserve pause when it meets next month to weigh the wind-down of its $85-billion-a-month bond-purchase program, Mr. Harris said.
"In the spring, we seemed to be weathering the fiscal shock reasonably well," Mr. Harris said. "It seems to me like we're entering another risky period."
—Maria Abi-Habib and Sam Dagher contributed to this article. Write to Dan Strumpf at email@example.com