Gulf stock markets fell at the beginning of trading on Wednesday, after the United States and Iran exchanged military strikes overnight. This weakened investors' hopes for a rapid easing of tensions in the Middle East.
Washington said it carried out air strikes on targets inside Iran, while Tehran announced a response by launching ballistic missiles at an American military base in Jordan, in addition to a massive drone attack targeting an American base in Bahrain, according to what Iranian media reported.
In Saudi Arabia, the main market index (TASI) fell by 0.3 percent, under pressure from utility, health care and basic materials stocks.
“Maaden” shares fell by 1.4 percent, while “Acwa Power” shares fell by 1.3 percent.
On the other hand, “Bahri” and “Petro Rabigh” shares bucked the general trend and rose by 2.1 percent each.
In a separate development, Saudi Arabia raised $3.25 billion by issuing dollar bonds in two tranches, in the second financing process through debt markets during the current year, at a time when subscription requests exceeded $15 billion, according to “IFR.”
Dubai's main index fell by 0.6 percent, with most listed stocks declining, as “Emaar Properties” stock fell by 1.3 percent and “SALIC” stock fell by 1.1 percent.
The Qatar Stock Exchange index also fell by 0.5 percent, under pressure from the decline of “Industries Qatar” shares by 1.2 percent and “Qatar National Bank” shares by 0.5 percent.
In Abu Dhabi, the main index fell by 0.7 percent, affected by losses in communications, technology and industrial stocks, as “First Abu Dhabi Bank” shares declined by 1.3 percent, and “Alpha Dhabi Holding” shares declined by 2 percent.
Futures fell on Wall Street on Wednesday, as bond yields and oil prices rose in the wake of US-Iranian tensions in the Middle East, reducing opportunities to buy stocks during a month that is usually weak in terms of returns.
The recent strikes brought geopolitical tensions to the forefront, ending the cautious calm that had prevailed over the past few weeks, and renewing concerns about inflation, according to Reuters.
“If hostilities are going to escalate, it will likely happen within the next two weeks,” said Ryan Isherwood, founder and CEO of Significance Capital. “The Iranians now have maximum influence before the midterm elections.”
Any escalation could further complicate interest rate forecasts. Over the past week, traders sharply increased their bets on a September interest rate hike, after Federal Reserve Chairman Kevin Warsh said curbing price pressures was the central bank's focus.
Isherwood added: “Interest rate expectations have been volatile, but we still believe that a rate hike just before the election is unlikely.”
Renewed tensions in the Middle East could lead to higher oil prices and exacerbate inflationary pressures by increasing costs for consumers and businesses.
Isherwood said that such a situation usually requires raising interest rates, but the Federal Reserve may find itself in trouble if higher costs also begin to slow economic growth.
By 4:25 a.m. EST, Dow Jones futures were up 7 points, or 0.01 percent, while S&P 500 futures were down 6.25 points, or 0.08 percent, and Nasdaq 100 futures were down 81 points, or 0.28 percent.
Stocks were also pressured by rising yields on risk-free US Treasury bonds, making it less attractive to take on additional risks to buy stocks.
Investors also face seasonal weakness. Since 1926, the Standard & Poor's 500 index has lost 0.7 percent on average during September, making it the weakest month of the year for stocks and the only month with an average negative return, according to Fisher Investments, based on data from Venion.
Among the most notable gainers in the pre-market session, Dell shares rose by 9.65 percent, after the company raised its annual profit and revenue expectations.
The performance of the “Magnificent Seven” group varied, as “Alphabet” shares rose by 0.81 percent, and “Tesla” shares rose by 0.42 percent, while “Nvidia” and “Microsoft” shares declined.
Shares of energy companies, which were among the few winners in recent sessions, rose with a slight rise in Brent crude prices. Chevron and Valero Energy shares rose by 0.4 percent each.
Investors will also be watching Friday's jobs report, which could help determine the direction of the stock market, while recent inflation data provided mixed signals.
Concerns are rising about the US fiscal outlook, as long-term Treasury yields have risen to their highest levels since 2007, and the national debt has surpassed $40 trillion.
This is not the first major challenge Washington has faced in the field of financing. US Treasury Secretary Scott Besent says the United States can overcome the debt problem by achieving growth. But history suggests that when the Treasury cannot rely on the usual mix of investors, debt instruments, and market conditions, it also resorts to inventing new methods of securing financing.
Here are six financing challenges that Washington faced, and how it was able to overcome them:
1- Creating new buyers
The American Civil War forced Washington to borrow at unprecedented levels. The federal debt rose from about $65 million in 1860 to about $2.7 billion in 1865, meaning that it nearly doubled every year during that period. By comparison, US public debt has grown at a compound annual rate of 6.6 percent since 1946, according to Morgan Stanley.
To absorb new issuance, Washington established rules that created a new class of buyers. National banking laws required federally licensed banks to back their currency with US government bonds.
Financier Jay Cooke also succeeded in attracting buyers, selling debt nationwide through banks and sub-agents, along with advertising campaigns and national appeals.
Cook's bonds, known as "five-twenties" and bearing interest at 6 percent, were callable after five years and matured after 20 years, with interest paid in gold. As for the “7-30” bonds, which had a three-year maturity, they paid an interest of 7.30 percent, or $3.65 annually, and were marketed on the basis that they cost “one penny a day” for an investment of $50, according to “Reuters.”
These campaigns helped turn federal debt into an investment product widely available to small investors.
2- Using “Wall Street”
By February 1895, the recession, gold exodus, and fears of a switch to silver had reduced the Treasury's gold reserves to $41.3 million, well below the $100 million threshold that was so politically important.
Bond sales to the public provided only temporary relief.
In the absence of a central bank, President Grover Cleveland enlisted the help of two major private financiers, J.P. Morgan and August Belmont, Jr., to lead a banking consortium that agreed to provide more than $65 million in gold, much of it from Europe, and to help stem further withdrawals.
In return, the coalition obtained about $62 million in 30-year Treasury bonds, with an interest rate of 4 percent.
The deal contributed to the stability of gold reserves, but it made Morgan and Belmont a symbol of Wall Street’s influence in public policy making, which reinforced a populist movement that was already growing.
3- Attracting savers and linking returns
Financing World War II required low-cost borrowing, along with limiting civilian spending to curb inflation. So Washington resorted to war bonds.
Through voluntary purchase programs through payroll deductions, about 27 million Americans were regularly purchasing these bonds by June 1943. By the end of the war, war bonds had financed about half of the debt accumulated during the war.
The Federal Reserve reinforced this system by subjecting monetary policy to the financing needs of the Treasury. Starting in April 1942, the Federal Reserve fixed Treasury bill yields at 0.375 percent, and effectively imposed a cap on long-term Treasury yields at 2.5 percent through open market purchases.
This kept the cost of government borrowing low, but increased inflationary pressures.
Once wartime controls were lifted, the price pressures they had suppressed exploded, leading to severe postwar inflation that made maintaining the peg impossible. It eventually ended with the agreement between the Treasury and the Federal Reserve in March 1951.
4- Implementing “Operation Twist”
By the early 1960s, foreign claims to the dollar were exceeding US gold reserves, threatening confidence in the convertibility of the dollar into gold. Washington wanted to limit capital flows abroad without stifling domestic growth.
“Operation Twist” came to achieve both goals, as the Federal Reserve sold short-term treasury bills and bought long-term treasury bonds, which led to raising short-term interest rates to support the dollar, while keeping long-term interest rates low to encourage investment.
The Treasury reinforced the strategy by issuing “ROSA bonds” denominated in foreign currencies, which were sold to foreign central banks and insulated against the risks of a decline in the value of the dollar.
Operation Twist was revived from 2011 to 2012, to help support the economic recovery after the global financial crisis of 2007-2009.
5- Let the market determine the price
Until the early 1970s, the Treasury sold bonds and securities on predetermined terms. But high inflation and volatile interest rates in the late 1960s made the fixed pricing system risky and made the Treasury vulnerable to paying investors too high returns or not taking advantage of market demand.
To allow the market to determine the price, in 1970 the Treasury Department began offering coupon bonds through auctions, and the coupon price was determined in advance, while investors competed for the price.
By mid-1973, auctions had replaced the old fixed-pricing methods for offering Treasury bonds and securities.
In 1974, the Treasury Department introduced yield-based auctions for certain coupon securities, with the results of the auction now determining both the price and the coupon rate.
This reform transferred the process of price discovery to investors, and laid the foundation for the US Treasury market in its current form.
6- Defending the dollar
The dollar came under new pressure in 1978, prompting the administration of President Jimmy Carter to launch an exceptionally strong defense campaign, which included issuing US government debt denominated in foreign currencies.
On November 1, 1978, Carter announced a coordinated support program with West Germany, Japan, and Switzerland, under which foreign currency resources amounting to the equivalent of $30 billion were collected for use in market intervention.
The program included expanding currency swap lines, a US withdrawal from the International Monetary Fund's reserve share, sales of Special Drawing Rights, in addition to borrowing in foreign currencies.
“Carter bonds,” denominated in German marks and Swiss francs and sold in the German and Swiss markets, were a pivotal element in these efforts. It provided foreign currency liquidity that could be used to buy dollars and help support the US currency.
