The conflict between the U.S. and Iran has escalated, with renewed military strikes marking the biggest exchange of fire since July. U.S. forces struck Iran's southern coast, and Iran retaliated by firing on American bases across the region. This intensification follows a month-long lull in fighting, which began on February 28. U.S. Central Command stated the strikes were in response to attempted attacks on shipping in the Strait of Hormuz and U.S. military bases, including a Marines base in Jordan. Iran accused the U.S. of killing at least 12 civilians in a missile strike, including five people at a wedding party in Sirik, and reported hits on multiple targets near the Strait of Hormuz. Iran also stated that two tankers were struck by mines while being guided through the strait by U.S. vessels.
The renewed hostilities have had a significant impact on global markets, particularly in bonds and energy. A global bond sell-off deepened, with U.S. 10-year Treasury yields climbing one basis point to 4.81%, their highest since late 2023. European bonds were hit harder, with U.K. 10-year gilt yields rising as much as seven basis points to 5.29% and German equivalent bonds climbing five basis points to 3.39%. This bond market reaction is attributed to fears that disrupted energy supplies will fuel inflation, prompting central banks to raise interest rates.
Oil prices have also seen an increase due to the conflict. Brent crude futures rose 25 cents to $94.90 a barrel, while U.S. West Texas Intermediate crude futures were up 10 cents at $90.32. Brent crude had hit its highest level since July 24, with a one-year rise of 36%, adding to inflation pressures. Natural gas prices surged to their highest level of the year, driven by concerns that renewed fighting in the Strait of Hormuz, a critical shipping lane for 20% of the world’s liquefied natural gas (LNG), will further constrain supplies.
Analysts are expressing concern about the market's reaction. Tim Waterer, chief market analyst at KCM Trade, noted that "Rising bond yields have emerged as the dominant story in the financial markets this week" and that "Higher bond yields do not bode well for economic growth or corporate earnings." Investors are now pricing in greater than 50% odds for rate hikes from major central banks, including the U.S. Federal Reserve and the European Central Bank. Fed Chairman Kevin Warsh has reiterated his commitment to tackling inflation, aiming for a 2% target, while the annual U.S. inflation rate was 3.4% in July.
