Last Week
It was a sea of red across financial markets as the conflict in the Middle East intensified and the economic data suggested that inflationary pressures lingered. Meanwhile, the Federal Reserve announced its decision to keep interest rates unchanged, with a hawkish tone from Chairman Powell during his press conference.
The Strait of Hormuz was the center of attention as Iran closed the strait to all tankers except those supplying its allies. In response, Brent futures rose around 8.9% to settle around $112 on Friday, while WTI Crude declined around 0.6% to around $98 per barrel. That divergence is rational as geopolitical trouble can lead to significant differences between Brent Crude and West Texas Intermediate. During times of crisis, the price gap typically widens as political uncertainty leads to surges in Brent Crude prices. WTI is less affected because it comes from landlocked regions insulated from coastal shipping disruptions.
On Wednesday, the Federal Reserve held the Fed Funds rate at 3.50%-3.75%, with the dot plot graph implying no interest rate cuts until later in the year. Earlier in the day, the February PPI came in hot at +0.7% month-over-month, which, when combined with the weakening jobs data, puts the Fed in a pickle. In its communication, the Fed cited the uncertainty of the Middle East conflict weighing on the economy, making forecasting with any accuracy impossible. Those concerns led to another 10-basis-point increase in the 10-year Treasury yield to 4.39%, its highest level since the end of July. The stock market suffered its fourth straight week of losses, with the S&P 500 dropping 1.9%, the Nasdaq Composite sliding 2.1%, and the Russell 2000 shedding 1.7%. Declining issues nearly tripled the number of advancing issues, with only the Oil& Gas sector finishing in the green. The Dollar edged lower, while Gold slumped 1.6%.
Alas, on the Chicago Sports Scene, the University of Chicago Basketball team lost to a hot-shooting Mary Washington squad in the elite eight of the Division 3 tournament.
This Week
The conflict in the Middle East will continue to overwhelm all other news. Traders will be closely tracking the oil market as a leading indicator.
As of 7:56 AM ET, risk assets were under pressure as Iran responded to President Donald Trump’s Strait of Hormuz ultimatum with renewed attacks across the Persian Gulf. Equities and bonds moved lower, with S&P 500 futures down 1% and global markets sliding toward correction territory. The dollar strengthened to a three-month high, while gold dropped to its lowest level of the year alongside a sharp decline in silver. Brent crude traded modestly higher, holding above $113 per barrel as the deadline to reopen the key shipping route drew closer.
Just minutes later, at 8:09 AM ET, sentiment reversed sharply. Markets rebounded after President Trump indicated the U.S. and Iran were having “very good” discussions around de-escalation. S&P 500 futures surged 1.7%, Treasury yields declined, and oil prices fell sharply, with Brent dropping more than 7% toward $104 per barrel. The dollar weakened slightly, while gold recovered some of its earlier losses.
The tone of the market is shifting in real time, often reacting to the latest headline or comment from the President. With the 48-hour ultimatum nearing expiration and no response, markets were firmly in the red. Yet, as soon as negotiations were mentioned, futures swung dramatically (from down 1% to up 1.7% in a matter of minutes) highlighting just how sensitive markets are to incremental developments.
Against that backdrop, multiple Fed officials will be on the speaking circuit. Any clarity on monetary policy direction given all the uncertainty would be meaningful to investors. The Economic data will include flash PMI readings and new home sales data and weekly jobless claims.
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