We’re coming toward the end of the second trading week since the US-Israel joint attack on Iran caused major damage to both sides’ oil facilities and disrupted trade through the Strait of Hormuz — where around 20% of global oil flows transit. Oil prices have been wavering up and down on the news ever since.
Several measures have been proposed to ease the oil rally: countries within the International Energy Agency said they would release a record amount of oil from their reserves; the US said it would insure and escort ships through the Strait of Hormuz; and Washington temporarily scrapped a century-old maritime law requiring American-built ships to transport goods between US ports, allowing foreign vessels to step in.
More surprisingly, the US announced earlier this week that it would tolerate continued purchases of Russian oil by India to help ease pressure on global oil prices. Yesterday, officials went even further by signalling broader flexibility around Russian oil flows.
So far, these efforts have been largely in vain. The strikes in the Middle East, damage to regional oil facilities and the closure of the Strait of Hormuz — with Iran possibly laying mines to prevent ships from passing — continue to keep upside pressure on oil prices tight.
WTI crude briefly rose to $98 per barrel before easing this morning, while Brent Crude hit $100pb and is consolidating near $98pb today. Quick measures are unlikely to relieve the pressure. If the bombings continue, the situation could worsen.
Rising oil prices have been fueling global inflation expectations since the beginning of the month. In the US, gasoline prices are up more than 25% since the start of the month and nearly 80% since the beginning of the year.
Oil prices are only part of the equation — tariffs are the other. Latest reports suggest that US trade officials are looking for ways to restore tariffs that the Supreme Court of the US judged unlawful earlier this year. If companies face both higher energy costs and renewed tariffs, they will ultimately pass those costs on to consumers.
As a result, the inflation outlook for the US — and the rest of the world — is deteriorating. And the US decisions remain decisive for global markets.
So what’s next? Investors tend to get used to war headlines faster than they get used to rising energy prices. The US 2-year yield — which closely reflects expectations for Federal Reserve (Fed) policy — spiked past 3.75% as rising energy prices erode hopes for Fed rate cuts.
Activity in Fed funds futures has also shifted: markets are no longer pricing a full 25bp cut this year, meaning investors increasingly believe the Fed may not cut rates at all in 2026 — even as Donald Trump continues to call for immediate rate cuts. But financial markets do not work that way. An unjustified rate cut would not necessarily help bring yields lower.
Consequently, the short end of the US yield curve is being pushed higher by the idea that the Fed may not cut rates this year, while the long end faces another pressure: the growing fear that a prolonged conflict could add further strain to US finances. The US 10-year yield is preparing to test the 4.30% level, while the 30-year yield topping 4.90%.
Equities are feeling the pinch from rising yields and growing stress in the private-equity space. More “cockroaches,” as Jamie Dimon calls them, are appearing in headlines every day. Banks are being shaken by their exposure to private credit companies facing record redemption requests due to heavy software selloff. And risk appetite in that the Saas-space remains weak despite falling valuations.
Adobe released earnings after the bell yesterday. Results topped estimates on both revenue and earnings, but the stock still slid 6–7% in after-hours trading as AI-related concerns combined with the announcement that the long-time CEO would step down.
Meanwhile, Big Tech stocks also slipped yesterday, shrugging off the optimism that followed Oracle earnings.
Overall, the S&P 500 fell 1.52% yesterday. Yet the index is still down less than 5% from its January peak — meaning that despite the combination of negative news — the Iran conflict, rising energy prices, fading Fed-cut expectations, AI anxiety and private-credit stress — the correction remains relatively shallow.
US and European futures are pointing to modest gains this morning, though the bearish outlook is unlikely to reverse until tensions in the Middle East materially ease — and that does not appear to be on the menu for now.
Today, investors will watch the latest US GDP and core PCE updates — with Core PCE Price Index being the Fed’s preferred gauge of inflation.
US growth is expected to slow from 4.4% to 1.4% in Q4 as consumer spending cools, high borrowing costs from the Fed weigh on demand, inventories normalize, AI investment momentum wanes, and tariffs add pressure to trade and business activity.
Core PCE, on the other hand, is expected to rise to around 3.1% — still sticky and well above the Fed’s 2% policy target. And that 3% mark comes before the surge in oil and gas prices triggered by the Middle East conflict.
That means the market reaction to today’s data could be asymmetric. Slower growth may matter less for markets right now than inflation. A strong PCE print could further crush hopes for Fed cuts this year, while a softer-than-expected reading may do little to calm fears that inflation could reaccelerate in the coming months.
Looking ahead, uncertainty, market volatility and the risk of slower global growth combined with rising inflation remain firmly on the menu. Markets will eventually find a floor — they always do — but further downside may come before that moment arrives.
