Oil prices escalated significantly, with Brent crude climbing over 3% to $78.50 a barrel and West Texas Intermediate crude rising 3.4% to $73.85 a barrel. This surge was driven by renewed US strikes against Iran and the ensuing confusion regarding the status of the Strait of Hormuz, a critical shipping lane. Iran claimed to have closed the waterway "until further notice," while the US military stated shipping continued, leading to heightened uncertainty and a "war premium" being reinserted into crude prices. This confluence of events raised concerns about potential supply disruptions and the risk of derailing efforts to rebuild global oil inventories.
Bond markets reacted negatively to the rising oil prices and inflation fears. The yield on the benchmark 10-year Treasury note advanced two basis points to 4.58%. Government bonds in Australia and Japan also saw declines, with Japan's 10-year yield climbing five basis points to 2.750% and Australia's 10-year yield up three basis points to 4.87%. The dollar strengthened against its Group-of-10 peers, while precious metals like gold and silver slid, with gold losing 0.8% to about $4,085 an ounce and silver dropping 1%. These movements reflect investor concerns that higher energy costs could complicate the disinflation narrative and prompt further interest rate hikes by the Federal Reserve.
Traders increased their bets on Fed tightening, with swaps pricing in almost 40 basis points of rate hikes by December, up from about 15 basis points in early June. This sentiment was further fueled by an earlier statement from Fed Chair Kevin Warsh, who is set to make his first congressional appearance since signaling a rollback of forward guidance on rate outlook. The renewed Middle East tensions coincide with the start of earnings season, featuring reports from major banks like Goldman Sachs Group Inc. and JPMorgan Chase & Co. These earnings will serve as a crucial test of whether corporate performance can justify recent market rallies driven by optimism in artificial intelligence.
