Following yesterday's session, US benchmark stock indices closed sharply lower. The S&P 500 fell 0.41%, the Nasdaq 100 was down 0.19%, and the Dow Jones Industrial plunged 1.13%.

After a shootout between the US and Iran that flared up Middle East tensions and aroused inflation concerns, stock markets retreated from record highs, and the US dollar strengthened. The MSCI Asia Pacific stock index slipped 0.5% from Monday's record close amid speculation that the war with Iran could escalate. Trading was thin because Japan, China, and South Korea were closed for holidays. Earlier, Wall Street indices also eased from their peaks after a rally in oil sent the global benchmark Brent above $115/bbl.

Renewed Middle East tensions threaten to inject fresh volatility into stock markets after a month of gains in risk assets that helped global indices recoup war-related losses and reach record highs, supported by strong earnings from the largest tech firms.

Recent events in the Middle East could materially affect the positive trend. The region remains a key player in global energy markets, and further supply disruptions could trigger larger rises in energy prices. That, in turn, could create renewed inflationary pressure and force central banks to rethink policy plans.

Stock markets could respond to an escalation with immediate declines. Risk-on investors may start withdrawing from more volatile assets and seek shelter in safer instruments such as government bonds or gold. That could prompt a market correction and interrupt the current uptrend.

"Even if the immediate conflict subsides, we expect the effects to be felt for some time," Wells Fargo said yesterday. "It is unlikely that the impact on energy prices, industrial activity and geopolitical risk premia will dissipate quickly."

On Tuesday, hundreds of vessels were reported off Dubai as more ships steered away from the still-empty Strait of Hormuz in response to Iranian attempts to expand their zone of control. Nevertheless, the US said it had opened passage through the waterway, and CBS reported that two American destroyers transited the Persian Gulf. Tehran has not confirmed those reports.

Meanwhile, the UAE accused Iran of a drone strike that sparked a fire at the port of Fujairah and, for the first time since the ceasefire between Washington and Tehran, issued several warnings about potential missile attacks.

In other markets, gold rose modestly to around $4,550/oz as signs emerged that buyers who accumulated on the dip were re-engaging after Monday's 2% decline triggered by the escalation.

During the US session, Treasury yields fell across the curve, with the 30-year yield dropping to 5%, the highest level since July.

S&P 500 technicals

The primary task for buyers today is to clear the nearest resistance at 7,233. That would signal upside momentum and open the way for a push to 7,256. Controlling 7,283 would further strengthen bulls' positions. On the downside, if risk appetite wanes, buyers must show up around 7,210. A break below that would quickly drive the instrument back to 7,190 and open the road to 7,174.