Oil prices advanced and global stocks faltered after a U.S. airstrike in Baghdad killed an Iranian military leader, recharging tensions in the oil-rich Middle East.
Brent crude gained as much as 4.2%, hitting an eight-month high at $69.01. U.S. crude climbed 3.4% to $63.26 in recent trading.
In the U.S., a recent stock rally came to a halt, with all three major indexes falling sharply after the opening bell. The Dow Jones Industrial Average lost 216 points, or about 0.8%, in early trading. The S&P 500 slid 0.7%. The Nasdaq Composite fell roughly 0.8%. All three indexes retreated from their records hit Thursday.
European stocks slumped, with the Stoxx Europe 600 down 0.4%.
Geopolitical risks “haven’t disappeared because markets have been doing well,” said Luca Paolini, chief strategist at Pictet Asset Management. “It’s an example of how when there’s complacency, a relatively small thing can come along and really change the direction suddenly,’’ he said.
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President Trump ordered the strike that killed Qassam Soleimani, the leader of Iran’s Islamic Revolutionary Guard Corps’ foreign wing, late Thursday. An Iraqi paramilitary commander, Abu Mahdi al-Mohandes, also died.
The Iranian foreign minister Javad Zarif called the strike “an act of international terrorism.’’
Despite U.S.-led sanctions, Iran exported an average of 599,000 barrels of oil a day in 2019, according to data from the International Monetary Fund.
The killing also pushed relations between the U.S. and Iraq to a low point since the 2003 invasion.
The news spurred a dash for haven assets like gold and government bonds. Gold prices were on track to rise for the eighth consecutive session, gaining 1.2% to $1,547.10 a troy ounce. Government bond yields dropped across the board, with the yield on the benchmark 10-year U.S. Treasury note down to 1.832%, according to Tradeweb, from 1.880% on Thursday. Yields fall as bond prices rise.
The WSJ Dollar Index, which tracks the U.S. currency against a basket of 16 others, rose 0.2% and the Japanese yen recently strengthened 0.4% against the dollar.
Shares of major oil companies were some of the biggest gainers in the S&P 500, while airline operators were among the biggest losers. Occidental Petroleum gained 2.9% while Hess added 1.8%. Marathon Oil advanced 1.6%.
Oil company stocks in Europe and Asia also climbed along with crude prices.
American Airlines Group declined 5%, while United Airlines Holdings fell 3%.
“The oil move due to the strike leads to geopolitical tensions and potential spillovers elsewhere, that’s the narrative,’’ said Jordan Rochester, an FX strategist at Nomura. This is resulting in a strengthening of the dollar and the yen, as investors seek to lower risk, he said. “The big question is will there be a follow up?’’
Some see the market reaction to the attack as relatively muted and point to previous geopolitical scares that markets quickly moved beyond.
In September, oil prices rose sharply and stocks fell after a drone attack on key Saudi Arabian oil facilities. But the situation quickly settled down and stock markets resumed their march higher for the year.
“We’ve seen this story before,” said Fahad Kamal, chief market strategist at Kleinwort Hambros, referring to repeated flare-ups over the years in Middle East tensions. “The big risk is that the event spirals out of control and we get contagion and some big retaliation. But we don’t expect this to happen,” he said.
Later Friday, investors will be watching for the release of minutes from the Fed’s December meeting. The central bankers held interest rates steady, and investors will be looking for details of how they arrived at this decision.
—Gunjan Banerji contributed to this article.
Write to Joanne Chiu at joanne.chiu@wsj.com and Anna Hirtenstein at anna.hirtenstein@wsj.com
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