We woke up to another rough week this morning after a weekend that failed to ease tensions in the Middle East. On the contrary, US President Donald Trump gave an ultimatum to Iran to reopen the Strait of Hormuz within 48 hours, otherwise he would “obliterate their power plants.” Iran responded by warning that it would target the region’s energy and desalination infrastructure—and we already had a preview of what that could look like last week.
Iranians appear more resilient than US and Israeli calculations had assumed, and there are growing warnings that this “operation” could turn into something bigger.
One interesting shift: markets are reacting less to Trump’s announcements—tweets and interviews alike—as the US is increasingly isolated in this conflict, with Western allies reluctant to step in. At the same time, the narrative is no longer fully in Washington’s hands, with Iran now shaping expectations and narrative on the ground. TACO hopes are fading.
Oil prices are higher this morning as risks build that regional energy infrastructure could suffer further damage, potentially triggering a larger and more prolonged energy shock. IEA’s Fatih Birol warned last week that this conflict could be the “greatest threat to global energy in history”—which can also be read as a reminder of the urgency to accelerate alternative energy efforts.
US crude started the week above $100 per barrel before easing slightly. Brent crude followed a similar path, jumping to $114pb before retreating toward $112pb. The relatively muted reaction compared to last week’s open suggests that: 1) markets are no longer pricing a quick resolution to the conflict, 2) the US is taking unusual steps such as easing constraints on some Iranian and Russian oil flows, and 3) higher oil prices are feeding into inflation expectations, pushing central bank bets in a more hawkish direction and raising stagflation risks.
In other words, slower global growth expectations could eventually temper demand. Recent price action suggests that the market is increasingly pricing an energy-shock-led slowdown as prices approach $120 per barrel—a level that may act as a near-term ceiling.
You may also ask: $120 for which crude? Because we are also seeing a growing divergence between WTI crude oil and Brent crude. These benchmarks reflect different markets: WTI is more US.-focused, while Brent is seaborne and far more exposed to global flows and geopolitical risks, especially tensions in the Middle East. As a result, when international risks rise, Brent tends to move higher, while WTI remains more anchored to domestic dynamics, widening the gap. In theory, arbitrage should bring them closer over time—but in practice, transport costs and export constraints mean the spread can persist for longer.
All that said, the medium-term outlook remains highly uncertain and markets are reacting. Nikkei futures are down more than 3% at the time of writing, China’s CSI 300 is off nearly 3%, and Korea’s Kospi is down over 6%. US and European futures also point to further losses at the open, while government bond yields are rising on two fronts: 1) higher short-term inflation risks, and 2) increased long-term fiscal pressures linked to military spending. The Trump administration has reportedly requested $200 billion from Congress to fund the Iran operation, adding to concerns after US debt surpassed $39 trillion.
As such, the US 10-year yield is pushing above 4.40%, its highest level since last summer. European moves are even more striking, with German and French 10-year yields at their highest since 2011, and the UK 10-year gilt yield nearing 5%—a level last seen in 2008—on speculation that the Bank of England (BoE) may need to shift from rate cuts to hikes to counter another energy-driven inflation shock. UK inflation update later this week will likely confirm that both headline and core CPI stand around 3% – above the BoE’s 2% target – and these figures reflect February prices – that was before energy prices spiked with the Middle East blast.
Rising rate expectations in Europe are not supporting the euro or sterling against a broadly stronger US dollar, as weaker growth expectations are currently outweighing rate differentials. That dynamic could shift later, but for now the dollar is benefiting from the geopolitical backdrop, alongside energy and defense stocks.
Gold, meanwhile, has not attracted the usual safe-haven inflows. A stronger dollar, rising global yields and the prior rally in gold prices are all weighing on demand. Gold has dropped to $1’358 per ounce this morning, below its 200-day moving average for the first time since last summer. The selloff could deepen if the dollar continues to strengthen and yields remain elevated, increasing the opportunity cost of holding non-yielding assets.
From a technical perspective, gold has entered a medium-term bearish consolidation below $1’610 per ounce—the 38.2% Fibonacci retracement of last year’s rally. A break below $1’335 could signal a deeper correction and potentially mark the end of the latest upward leg.
