US stocks fall as Iran conflict lifts oil, inflation and Fed rate hike bets

• Oil prices surged over 3% after US strikes on Iranian positions at Larak Island and retaliatory attacks, with WTI crude rising above $86 and Brent above $91 per barrel
• Fed rate hike probability for September jumped to nearly 60% from 41.4% a week earlier, driven by elevated oil prices and recent hawkish commentary from Fed officials about achieving the 2% inflation target
• Treasury yields reached multi-year highs amid inflation concerns, while the upcoming August jobs report on September 4 will be closely watched for policy direction

Summary

Market Movement: US stocks declined Monday as geopolitical tensions and inflation concerns weighed on sentiment. The Dow Jones fell 346 points, the S&P 500 remained flat, and the Nasdaq dropped 0.52%. This weakness comes as markets enter September, historically a challenging month for equities, following strong August gains (Dow +2.1%, S&P 500 +3%, Nasdaq +4%).

Geopolitical Catalyst: Renewed US-Iran military clashes in the Middle East disrupted shipping through the Strait of Hormuz. The US struck rocket launchers on Iran's Larak Island—the first acknowledged attack on Iranian positions since late July—prompting Iranian retaliation on US bases in Jordan.

Oil Prices: West Texas Intermediate crude surged over 3% above $86/barrel, while Brent crude rose above $91/barrel. Energy stocks benefited, with Halliburton gaining 3.04% and Valero Energy up 1.84%.

Federal Reserve Outlook: Rate hike expectations increased significantly following hawkish comments from Fed official Warsh at the Jackson Hole symposium. CME FedWatch data shows traders now pricing in a 60% probability of a September rate hike, up from 41.4% the previous week. Treasury yields reached multi-year highs amid inflation concerns.

Key Data Ahead: The critical August employment report releases September 4, alongside manufacturing and services data throughout the week.

Sector Performance: Technology led August gains with the sector up nearly 6%. Nvidia rose 8% for the month, while Microsoft and Micron gained 10% and 13% respectively. Bitcoin traded below $78,000.

Market Implication: Higher oil prices combined with Fed tightening expectations create a challenging environment for equities, particularly with elevated inflation risks.