US stocks drop from record highs, ahead of reports indicating health of economy

Oil prices saw a surge due to increasing concerns about potential violence escalation in the Middle East and possible disruptions to crude oil flow from the region

US stocks have taken a tumble from their record highs on Tuesday, ahead of reports that could indicate the health of the economy.

The S&P 500 fell by 0.9% in morning trading, just a day after reaching an all-time high for the 43rd time this year. The Dow Jones Industrial Average also dropped by 259 points or 0.6%, following its own record. As of 9:55am Eastern time, the Nasdaq composite was down by 1.3%.

Oil prices saw a surge due to increasing concerns about potential violence escalation in the Middle East and possible disruptions to crude oil flow from the region. Benchmark US crude rose by 2.7%, exceeding $70 per barrel. These worries led to a decrease in stock prices and an increase in Treasury bonds and other safer investments.

This subsequently resulted in a drop in Treasury yields, which had already been on a downward trend following positive inflation updates from Europe. The slowdown in inflation could provide the European Central Bank with more room to cut interest rates swiftly. .

In the United States, stocks have reached record highs on the back of hopes that the US economy can continue to grow despite recent slowdowns. This is as the Federal Reserve cuts interest rates to stimulate growth. Last month, the Fed lowered its main interest rate for the first time in over four years, indicating further cuts through next year.

The Fed has made a significant U-turn, having previously maintained the federal funds rate at a 20-year high in an attempt to slow the economy and curb high inflation. These high rates have successfully reduced inflation from its peak over two years ago, but they have also forced US employers to cut back on hiring.

Later today, the US government will provide an update on the number of job vacancies advertised by US employers at the end of August, with economists predicting a figure similar to July's 7.7 million.

Another update will reveal the state of the US manufacturing industry, which has been one of the sectors most affected by the economic downturn and has been contracting due to high rates. Economists predict that Tuesday's report will show another month of contraction in September, although not as severe as in August.

A potential threat to the economy could come from the strike by dockworkers at 36 ports across the eastern United States, which could disrupt supply chains and increase inflation. The workers are demanding a labour contract that prevents automation from taking their jobs, among other things.

So far, the financial markets have remained calm in response to the strike. Supply chain experts suggest that consumers won't immediately feel the impact of the strike, as most retailers have stocked up on goods, advancing shipments of holiday gift items.

In the bond market, a subtle dip was noted as the yield on the 10-year Treasury shed some points, dropping to 3.71% from 3.79% as observed on Monday evening. Additionally, following the release of inflation data, Europe experienced even greater declines in bond yields.

On the other side of things, stock markets across Europe saw fluctuations, initially showing modest gains but soon shifting to losses after a report indicated that inflation within the eurozone had dropped below 2% for the first time in over three years come September. .

This resulted in a dip of 0.5% on France's indexes and a slight descent of 0.1% in Germany. Moving towards the east, Japan shared positive insights from the Bank of Japan which disclosed an optimistic outlook among large manufacturers, contradicting any pessimism regarding current business conditions as per their recent "tankan" survey.

Furthermore, Japan reported a decrease in unemployment rates for August, down to 2.5% from July's 2.7%, meeting market predictions. After suffering a substantial loss of 4.8% the previous day, Japan’s benchmark Nikkei 225 bounced back with a rally of 1.9%.

As holidays took place, trading sessions stood still in China and South Korea with mainland Chinese markets resting until October 7th due to the National Day break despite discerning their best day since 2008 only on Monday.