Global markets experienced a downturn as surging oil prices, driven by escalating conflict between the US and Iran, triggered worries about inflation and potential interest rate hikes by central banks. West Texas Intermediate crude rose 5.9% to $90.82 a barrel, contributing to global bond yields reaching their highest levels since 2008. This environment reduced investor appetite for equities, with the S&P 500 falling 0.7%, the Nasdaq 100 dropping 1.3%, and the Dow Jones Industrial Average decreasing 0.8%. Similarly, the MSCI World Index fell 0.7%.
The renewed geopolitical tensions in the Middle East, particularly concerns about disruptions in the Strait of Hormuz, are seen as a primary driver of the oil price surge. This has led analysts like Fawad Razaqzada of Forex.com to warn that "Higher oil prices are threatening to reignite inflation, raising the risks of tighter monetary policy." Investors are demanding higher compensation to hold bonds, influenced by inflation concerns, government spending, and increased borrowing for AI development. Money markets are now factoring in a higher probability of a Fed hike in September.
Adding to rate hike expectations, Fed Chair Kevin Warsh indicated that officials would need to act if inflation doesn't ease, a stance echoed by Fed Governor Michael Barr. The yield on 10-year Treasuries advanced four basis points to 4.79%, while Britain’s 10-year yield surged 16 basis points to 5.22%. Despite the market movements, Matt Maley of Miller Tabak noted that "The stock market has been able to ignore these moves so far this year. However, as we have seen in the past, higher yields don’t matter for stocks until they do."
Cryptocurrencies also felt the impact, with Bitcoin falling 2% to $77,247.48 and Ether dropping 2.4% to $2,412.93. The Bloomberg Dollar Spot Index rose 0.2%, while major currencies like the euro, British pound, and Japanese yen all depreciated against the dollar. Spot gold also fell 2.4% to $4,330.08 an ounce amidst elevated Treasury yields and a stronger dollar. Asian stocks mirrored the global trend, with the MSCI Asia Pacific Index slipping 0.2%, and benchmarks in South Korea and Japan declining.
