(July 14): A stand-off between the US and Iran lifted oil prices, with stocks joining bonds lower after clashes over the Strait of Hormuz raised concerns about a disruption in energy supplies that could fuel inflation.
Those worries halted back-to-back gains in the S&P 500, which also fell amid a chipmaker rout. Brent crude topped US$83 as President Donald Trump said the US would restart a blockade on Iranian ships transiting Hormuz and charge all other cargo moving through the waterway. Money markets priced in about 50% odds of a Federal Reserve hike in July as governor Christopher Waller said officials may need to raise rates to tame price pressures.
The latest wave of attacks between the US and Iran dashed hopes for a near-term normalisation of traffic through the key energy chokepoint. Oil extended gains in late hours as Trump said in a radio interview that “we are going to hit them very hard tonight, and we are going to hit them hard tomorrow.”
“The energy sector is once again in the limelight as the status of the Strait of Hormuz is driving price action in global markets,” said Ian Lyngen at BMO Capital Markets. “There is a growing sense that the situation is likely to get worse before it de-escalates.”
Until something changes with the status of Hormuz, the bias remains for higher oil prices, expected inflation and rates, with that triggering episodes of stock volatility, noted Paul Christopher at Wells Fargo Investment Institute.
The flare-up in geopolitical tension comes at a time when Wall Street investors are getting ready for the start of the earnings season, with markets growing uneasy over whether the enormous sums being poured into artificial intelligence will pay off.
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“Uncertainty around the Middle East continues, but we think the AI wave is what will drive markets over the next few weeks, especially as earnings season kicks off,” said Sonu Varghese at Carson Group.
The ongoing swings in semiconductor shares has made it difficult for tech to mount a sustained push to the upside while escalating hostilities and rising oil prices won’t help the bullish cause, Chris Larkin at E*Trade from Morgan Stanley.
“Headline inflation numbers are expected to cool this week, but the market may not get as much of a boost from good news if traders think oil is headed higher again,” he noted.
See also: Stocks fall as US-Iran jitters spur rally in oil
The recent drop in gasoline prices likely helped drag down the consumer price index, with the gauge due on Tuesday expected to show its first monthly decline since the onset of the pandemic in 2020. Still, Wednesday’s producer price index could underscore upstream pressures continuing to build. On both days, Kevin Warsh will make his first appearances before Congress as the Fed chairman.
Uploaded by Isabelle Francis
