KEY POINTS

  • Crude oil futures jumped by as much as 4% before settling back down
  • Analysts worry Iran could attack oil infrastructure in Gulf region
  • The Fed worries that low interest rates could encourage excessive risk taking

U.S. stocks finished lower on Friday, but closed above intraday lows, after an airstrike ordered by President Donald Trump killed Iran’s top commander in Baghdad and triggered fears of retaliation by Tehran and the potential for a new war.

The Dow Jones Industrial Average dropped 235.48 points to 28,633.32 while the S&P 500 fell 23.18 points to 3,234.67 and the Nasdaq Composite Index dipped 71.42 points to 9020.77.

For the holiday-shortened week. the Dow finished roughly flat.

Crude oil futures surged 2.97% at $63 per barrel and Brent crude edged up 0.04% at $68.63. Gold futures gained 1.5%.

Friday's volume on the New York Stock Exchange totaled 2.66 billion shares with 1,346 issues advancing, 133 setting new highs, and 1,593 declining, with 9 setting new lows.

Active movers were led by NIO Inc. (NIO), General Electric (GE) and Advanced Micro Devices (AMD).

An U.S. air strike in Iraq killed top Iranian commander Lt. Gen. Qassem Soleimani in Baghdad early Friday morning, Iraq time.

Iran has vowed retaliation for the killing. “A crushing revenge will be taken for Soleimani’s unjust assassination. We will take revenge from all those involved and responsible for his assassination,” Iranian Defense Minister Amir Hatami said.

The U.S. military said it will deploy 3,500-4,000 additional soldiers to Iraq, Kuwait and other parts of the Middle East.

Analysts were also concerned by the escalation of tensions between the U.S. and Iran.

“Global oil markets will be volatile for weeks to come,” said Greg Valliere, chief U.S. policy strategist at AGF Investments, in a note. “There’s a reason, finally, for caution in the stock market. Eventually there will be an uneasy truce. But that’s a long, long way off; this will get worse before it gets better.”

Stephen Innes, chief Asia market strategist for AxiTrader, wrote in a note: “This is more than just bloodying Iran’s nose. This is an aggressive show of force and an outright provocation that could trigger another Middle East war.”

Helima Croft, head of global commodity strategy at RBC Markets, told CNBC: “This brings us to the precipice of a full-blown shooting war with Iran -- not a shadow war or a proxy war. It is almost impossible to overstate the implications of this event.”

“We expect moderate to low level clashes to last for at least a month and likely be confined to Iraq,” said Henry Rome and Cliff Kupchan, analysts from the Eurasia Group. “Iranian-backed militias will attack U.S. bases and some U.S. soldiers will be killed; the U.S. will retaliate with strikes inside of Iraq,”

The price of oil, Rome and Kupchan noted, “will likely hold” at about $70 a barrel, “but could make a run at $80 if the conflict spreads to the oil fields of southern Iraq or if Iranian harassment of commercial shipping intensifies.”

The minutes from the December 2019 meeting of the Federal Open Market Committee revealed that the board thought its monetary policy – having left rates unchanged after three straight cuts -- was appropriate “for a time” even amid some persistent downside risks.

“Nevertheless, global developments, related to both persistent uncertainty regarding international trade and weakness in economic growth abroad, continued to pose some risks to the outlook,” the central bank cautioned.

The committee also suggested policy will remain on hold through 2020, a presidential election year.

But Fed officials fretted that inflation stayed short of their 2% target.

“Various participants were concerned that indicators were suggesting that the level of longer-term inflation expectations was too low,” the minutes stated. “A number of participants noted that the labor force participation rate could rise further still.”

Fed officials also worried that low interest rates could encourage too much risk-taking.

“A few participants raised the concern that keeping interest rates low over a long period might encourage excessive risk-taking, which could exacerbate imbalances in the financial sector,” the minutes indicated. In addition, low rates “could make the next recession more severe than otherwise” if risk-taking led to financial instability.

In economic data, The Institute for Supply Management said its manufacturing index fell in December to 47.2 – the lowest such level since June 2009, when it was at 46.3.

Construction spending during November 2019 rose 4.1% from the year-ago period, and 0.6% above the revised October 2019 estimate.

Overnight in Asia, markets finished mixed. China’s Shanghai Composite slipped 0.05% while Hong Kong’s Hang Seng fell 0.32%. Japan’s Nikkei-225 dropped 0.76%.

In Europe markets traded lower, with Britain’s FTSE-100 down 0.16%, France’s CAC-40 off 0.26% and Germany’s DAX edging 1.35% lower.

The yield on the 10-year Treasury plunged 4.99% to 1.788% while yield on the 30-year Treasury dropped 3.93% to 2.249%.