Yesterday’s sharp rise in oil prices was the market’s response to renewed tensions in the Middle East. Brent crude gained around 6% and ended the session near USD 113 per barrel. Since the start of the war, its price has already increased by 57%. The exchange of fire between the United States and Iran showed how fragile the current ceasefire remains. Markets interpreted the events as a signal that the conflict could once again enter a hot phase. Such information has an immediate impact, with investors quickly raising the risk premium. This is particularly important after weeks of rising equity prices, during which markets had partly ignored the risk of renewed escalation.
The US military yesterday repelled Iranian drone and missile attacks while escorting two vessels through the Strait of Hormuz. The escalation also involved the United Arab Emirates, which reported intercepting Iranian missiles. An Iranian drone was also said to have caused a major fire at the port of Fujairah. In addition, the UAE issued missile alerts for residents for the first time since the start of the ceasefire. This was a significant exchange of blows at a time when investors had been expecting a gradual easing of tensions.
Equity markets also came under pressure. Technology companies lost the least, supported by solid financial results. The Nasdaq fell by 0.19%, the S&P 500 lost 0.41%, and the industrial Dow Jones declined by 1.13%. The Polish market also felt the impact of global turbulence, although the reaction of the WIG20 remained calm. The index rose by 0.11%, showing that local investors did not respond with a sharp sell-off.
Rising oil prices are increasingly affecting the bond market as well. The yield on 30-year US Treasuries exceeded 5% for the first time since July last year. Investors began pricing in the risk that the Federal Reserve may not only postpone interest rate cuts, but could even be forced to raise rates again. Markets now price in around a 70% probability of a Fed rate hike within the next year, a major shift from expectations before the conflict began, when investors had assumed a series of cuts.
This shows that oil is no longer only a commodity market issue. More expensive energy changes the inflation outlook, and therefore also the path of interest rates. In such an environment, central banks have increasingly limited room to ease policy, because every new wave of fuel price increases can quickly feed into inflation expectations.
The current situation is difficult for markets. US command yesterday avoided giving a clear answer on whether the ceasefire had been formally broken. Iran, meanwhile, says talks with the United States are making progress, while at the same time warning Washington and the UAE against being drawn back into the conflict. Under these conditions, market stabilisation may be hard to achieve. Any new piece of information can change the pricing of oil, equities, bonds and currencies within minutes. This is especially true after Donald Trump also presented the “Freedom Project” yesterday — a plan to help evacuate stranded ships from the Persian Gulf, which could become another source of tension.
The Strait of Hormuz remains the main point of dispute. Iran is blocking most maritime traffic and has made reopening the strait conditional on the United States lifting its blockade of Iranian ports. In this context, energy has become an important negotiating tool. It is no longer merely a commodity whose price reflects the balance of supply and demand.
At present, the most likely scenario remains a prolonged conflict with periodic fighting and persistently high oil prices. This is a particularly uncomfortable scenario for investors because it extends a period of intense uncertainty. There is no full-scale war, but there is also no peace that would allow the risk premium to fall. Instead, markets are stuck in an intermediate state, reacting from one statement to the next, while oil and gas prices remain vulnerable to sudden moves.
