Markets On Edge Ahead Of Fed Announcement: Oil Spikes After Hamas Leader's Death, BoJ Hikes Rates, Eurozone Inflation Rises, US Jobs Disappoint

Markets are on edge as investors digest a slew of geopolitical events, corporate earnings, and economic data in this final session of July, which promises to be highly volatile ahead of the Federal Open Market Committee (FOMC) meeting.

Geopolitical Tensions Flare Up In Middle East, BoJ Moves, US Data Disappoint

The situation in the Middle East reached a critical turning point after the political leader of Hamas, Ismail Haniyeh, was killed by Israeli forces in Tehran, Iran, on Wednesday morning. Reuters reported that Hamas’ armed wing stated Haniyeh’s killing would “take the battle to new dimensions and have major repercussions,” while Iran declared three days of national mourning and vowed to retaliate, potentially leading to a dangerous escalation in the region.

This incident followed another assassination on Tuesday in Beirut, where Israeli forces killed Fuad Shukr, Hezbollah's most senior military commander and Hassan Nasrallah's right-hand man. According to the Israeli Defense Forces, Shukr was responsible for the death of 12 children in a soccer field on Saturday and had orchestrated 30 years of Hezbollah terrorist attacks.

On the macroeconomic front, the Bank of Japan (BoJ) increased interest rates by 0.15 percentage points to 0.25%, marking the second such move since March. Japan's monetary authorities also announced the reduction in their bond-buying program from JPY 6 trillion to JPY 3 trillion for January-March 2026.

Inflation in the Eurozone unexpectedly rose to 2.6% from 2.5%, contrary to forecasts of a slowdown to 2.4%, raising some questions on the imminent need of further European Central Bank’s rate cuts. Core inflation, excluding energy and food, remained at 2.9%, missing the expected drop to 2.8%. However, services inflation eased for the first time in three months.

In the U.S., private employers added 122,000 jobs in the past month, the lowest since January 2024 and down from the revised 155,000 jobs in June, according to the ADP National Employment Report. This figure missed the projected 150,000 job additions.

Mortgage applications fell by 3.9% in the fourth week of July, following a 2.2% drop the previous week, marking the sharpest weekly decline in mortgage demand in nearly two months. This occurred despite 30-year mortgage rates holding at February lows of 6.82%. Applications for new home purchases fell by 1.5%, the third consecutive decline.

Market Reactions: Oil Spikes, Dollar Falls

The most immediate market reaction to the tense situation in the Middle East was a spike in oil prices. West Texas Intermediate (WTI) prompt futures, tracked by the United States Oil Fund USO, rallied over 3.5% on Wednesday morning amid fears of supply disruptions due to Iran's involvement. Oil is on track for its strongest session since mid-November 2023.

The U.S. dollar weakened against major currencies, affected by disappointing U.S. labor market data and higher-than-expected Eurozone inflation.

The U.S. dollar index, as tracked by the Invesco DB USD Index Bullish Fund ETF UUP, fell over 0.4% at 08:40 a.m. in New York.

The Japanese yen, monitored through the Invesco CurrencyShares Japanese Yen Trust FXY, rallied 1.6% following the BoJ’s rate hike.

U.S. equity futures surged in premarket trading, with contracts on the tech-heavy Nasdaq 100 up over 2%, poised to recover losses from the previous day.

Semiconductor gains drove overall U.S. major indices higher on Wednesday, following positive results from Advanced Micro Devices Inc. AMD. Notably, ASML Holding NV ASML rose over 5.7% in European markets, as Reuters reported the company would not be affected by U.S. export restrictions on chipmaking to China.

Shares of NVIDIA Corp. NVDA were nearly 7% higher in premarket trading. The VanEck Semiconductor ETF SMH soared over 5%.

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Image created using artificial intelligence via Midjourney.