Oil prices, specifically Brent crude, climbed to $91.42 a barrel, their highest level since June, following an escalation of US and Iranian military attacks that have expanded beyond traditional military targets. West Texas Intermediate crude also rose by 2.3% to $84.39 a barrel. This surge in oil prices has reignited inflation concerns, leading to a decline in bond markets. Australian and New Zealand government bonds fell, and Treasury 10-year futures slipped, although the cash market was closed due to a holiday.
Analysts are expressing concern about the broader economic impact. Charu Chanana, chief investment strategist at Saxo Markets, warned that higher oil prices revive inflation risks and tighten financial conditions for energy-importing economies. Dilin Wu, a strategist at Pepperstone Group Ltd., noted that the ongoing conflict and rising oil prices mean markets are repricing the situation. One analyst highlighted that oil above $90 makes the Federal Reserve's job of managing inflation more difficult, reversing recent positive trends where inflation was cooling and rate hike expectations were coming down.
The market instability is also linked to a broader tech stock selloff, as investors question the sustainability of the artificial intelligence spending boom. Despite recent benign US data showing consumer prices dropped in June for the first time in six years, the escalation in the Middle East has brought inflation back into focus, potentially pushing the Federal Reserve to consider interest rate hikes in September or October. Forward markets are currently anticipating about two rate hikes by the first quarter of 2027.
