Stocks and government bonds experienced a downturn as fresh US strikes on Iran led to a significant increase in oil prices, concurrently fueling speculation about further interest rate hikes by the Federal Reserve. Brent crude jumped 4.7% to $79.55 a barrel amidst conflicting reports regarding the status of the Strait of Hormuz, sparking fears of potential supply disruptions. This geopolitical tension prompted traders to anticipate that higher oil prices would rekindle inflation, leading to a prolonged period of tighter monetary policy.
The upcoming week is considered pivotal for investors, with the start of earnings season poised to assess whether companies can sustain the profit growth required to support the AI-driven market rally. Furthermore, critical US inflation data and Federal Reserve Chair Kevin Warsh's congressional testimony will offer crucial insights into the future direction of interest rates. The dollar, serving as a safe haven during the Middle East conflict, strengthened against all Group-of-10 peers, as the prospect of higher oil prices amplified expectations of the Fed raising rates to combat inflationary pressures. This made non-yielding precious metals like gold and silver less attractive, causing their prices to fall. The US's status as a net oil exporter also contributed to the dollar's appreciation.
Investors are closely monitoring this week's US inflation figures, as the rebound in oil prices has renewed concerns that escalating energy costs could complicate the narrative of disinflation. Swaps are currently pricing in almost 40 basis points of Fed rate hikes by December, a notable increase from approximately 15 basis points in early June. Julia Wang, Chief Investment Officer for North Asia at Nomura International Wealth Management, commented that she expects July to be a volatile month for equities, largely due to inflation and rate-hike anxieties, with the eruption of fighting in Iran exacerbating these challenges.
Fed Chair Warsh is scheduled to make his first congressional appearance since assuming his role, having previously pledged to reduce forward guidance on the rate outlook. Earlier this month in Sintra, Portugal, Warsh stated that inflation risks have decreased recently and reiterated his commitment to bringing inflation back to the US central bank's 2% target. However, Kenneth Crompton, head of rates strategy at National Australia Bank Ltd. in Sydney, noted that Warsh is less likely to significantly impact Treasuries unless he deviates from his established tone. Markets are currently more sensitive to headlines concerning Iran. Despite these concerns, the earnings season is anticipated to be "solid," buoyed by tech companies and a reasonably healthy economy.
