European stock futures were lower early Tuesday, mirroring declines in Asian benchmarks, while the U.S. dollar strengthened, Treasury yields rose, and oil futures and gold gained. The primary driver was the renewed escalation in the U.S.-Iran conflict, which propelled oil prices higher and heightened inflation fears. President Trump's warning to "hit them hard" after American forces struck Iranian launch sites and Iran retaliated with missiles at Jordan, contributed to the tensions. Analysts from Commerzbank Research noted that these hostilities dashed hopes for normalizing shipping through the Strait of Hormuz.
The U.S. dollar benefited from the ongoing Middle East tensions. NAB's senior FX strategist, Rodrigo Catril, indicated that the U.S. struck Iranian rocket launchers on Larak Island, and Iran retaliated against bases in Jordan. This surge in oil prices led to a risk-off sentiment in the markets. Simultaneously, U.S. government bond yields increased as higher crude oil prices fueled inflation worries and the prospect of tighter monetary policy from central banks. Vishnu Varathan of Mizuho Securities noted that the "resumption of kinetic U.S.-Iran conflict has lifted oil along with UST yields."
Oil prices rose significantly as the Middle East conflict stretched into its seventh month. Brent crude climbed above $90 per barrel, reigniting inflation concerns and affecting equities and government bonds. Rodrigo Catril, senior FX strategist at National Australia Bank, highlighted that officials from both sides are preparing for the conflict to last for months due to deadlocked talks. Consequently, the overnight index swap and Fed fund futures markets are now pricing in approximately a 70% probability of a September interest rate hike by the Federal Reserve, according to Michael Wan, senior currency analyst at MUFG Bank.
