Global markets experienced a downturn as fresh US military strikes on Iran led to a surge in oil prices and heightened expectations for Federal Reserve interest-rate hikes. Brent crude jumped 4.7% to $79.55 a barrel amid conflicting reports regarding the status of the Strait of Hormuz, fueling concerns about potential supply disruptions. This geopolitical tension also caused US Treasuries to fall across the curve, with the yield on the rate-sensitive two-year note reaching its highest level since February 2025. The dollar strengthened against all its Group-of-10 peers, acting as a safe haven, while gold and silver, non-yielding precious metals, saw their prices decline.
The prospect of higher oil prices rekindling inflation and thus leading to a tighter monetary policy has revived what traders are calling the "Middle East playbook." Investors are now entering a pivotal week, marked by the start of earnings season, which will test the sustainability of the AI-fueled rally, and crucial US inflation data. Swaps are currently pricing in almost 40 basis points of Fed rate hikes by December, a significant increase from approximately 15 basis points in early June. This sentiment is reinforced by analysts like Julia Wang, chief investment officer for North Asia at Nomura International Wealth Management, who anticipates a volatile July for equities due to inflation and rate-hike worries, compounded by the conflict in Iran.
Fed Chair Kevin Warsh is scheduled to make his first congressional appearance since taking office, where he will provide further insights into the interest rate outlook. Earlier in Sintra, Portugal, Warsh indicated that price risks have decreased in recent weeks and reiterated his commitment to bringing inflation back to the Fed's 2% target. While Warsh's testimony is anticipated, Kenneth Crompton, head of rates strategy at National Australia Bank Ltd., suggests that his influence on Treasuries might be limited unless he deviates from his established tone. The market's immediate sensitivity is currently directed more towards the headlines concerning Iran.
