Iran Ceasefire Collapses, Oil Surges, Stocks Tumble as Inflation and Rate-Hike Fears Return

On July 8, President Trump declared at the NATO summit in Turkey that the ceasefire with Iran was “over.” The US military then launched retaliatory strikes against dozens of targets near Iran’s coastline, and Iran responded by firing missiles at Bahrain, Kuwait, and Qatar.^{[Greenwich Time]} The move shattered a fragile peace that had lasted only weeks, sending global financial markets into a tailspin. As of 7 a.m. ET on July 9, pre-market trading was still absorbing the shock of this geopolitical upheaval.

Oil Surges, Strait of Hormuz Shipping in Crisis

The most immediate reaction to the ceasefire’s collapse was a surge in crude prices on Wednesday. According to The Times of Israel, Brent crude briefly jumped 8%, topping $80 a barrel before easing; US WTI crude for August delivery rose 7.7% to settle at $75.83.^{[The Times of Israel]} NPR also reported that both US and international benchmarks gained about 7% on Wednesday, though they remain well below their spring peaks.^[NPR]

At the heart of the crisis is the Strait of Hormuz, the critical waterway through which about one-fifth of the world’s oil passes. ING commodity strategists Warren Patterson and Ewa Manthey noted in a commentary that tanker traffic through the strait has already declined, reigniting investor fears about supply.^{[Greenwich Time]} While Wednesday’s jump was smaller than the spikes seen in the early days of the war, the consensus is that oil has room to run higher if the conflict persists. NPR noted that US retail gasoline prices rose less than a penny per gallon overnight, according to AAA, but could climb further in the coming days as higher crude costs filter through.^[NPR]

Stocks Hammered, but Tech and AI Still in Favor

The geopolitical shock quickly hit equities. On Wednesday, the Dow Jones Industrial Average tumbled more than 800 points, or 1.5%, just two days after hitting an all-time high.^[NPR] Chris Beauchamp, chief market analyst at IG, said the “imminent restart of war” between the US and Iran triggered a sell-off in Europe, which is highly sensitive to energy costs.^{[The Times of Israel]}

But the sell-off wasn’t universal. Bloomberg reported that Asian markets opened on Thursday with a tech-led rebound, led by chip stocks. The MSCI Asia Pacific Index rose 0.7%, and South Korea’s KOSPI—a bellwether for chip and AI investment—surged more than 3%.^[Bloomberg] “While the Middle East situation is worrying, the market doesn’t seem to think it’s time to fully exit equities,” said Nomura senior strategist Takashi Ito. “The prevailing logic is that investors can continue to bet on AI and chip stocks, which are expected to deliver high long-term returns.”^[Bloomberg] On Thursday, Japan’s Nikkei 225 rose 1.6%, with chip-equipment maker Tokyo Electron jumping 5% and SoftBank Group up 0.4%.^{[Greenwich Time]}

Inflation Fears Intensify, Fed Rate-Hike Odds Advance

The oil spike has reignited inflation fears and rapidly shifted expectations for Fed policy. NPR reported that the CME FedWatch tool now shows investors see a better-than-one-in-three chance of a rate hike later this month, up from roughly one-in-four on Tuesday, before the ceasefire collapsed.^[NPR] Bloomberg also noted that money markets have pulled forward their expected date for the next Fed rate hike from December to October.^[Bloomberg]

The central bank, now led by new Chair Kevin Warsh, is closely watching energy prices. NPR noted that energy costs have already pushed inflation well above the 2% target.^[NPR] Meanwhile, the Trump administration is preparing to implement a new round of global tariffs, which could add further upward pressure on import prices in the second half of the year.^[NPR] Bond markets reflected the anxiety, with US Treasuries sold off on Wednesday, pushing the two-year yield to 4.23%, near the highs hit last month.^[Bloomberg]

Yen Under Pressure, Japan Faces Multiple Headwinds

The oil shock from the Middle East conflict is an additional burden on Japan’s energy-import-dependent economy, further weakening the yen. According to Fortune, the yen fell to 162.30 against the dollar on Monday, down 3.6% year-to-date and nearly 11% from a year ago, near 40-year lows.^[Fortune]

The report noted that the recent trigger for the yen’s decline was market concern that Japan is lagging in its fight against inflation after absorbing the oil shock from the Iran war. While the Bank of Japan has raised rates, it may need more aggressive tightening. At the same time, other central banks like the Fed may take a stronger stance, making Japan’s monetary policy and the yen relatively weaker. Additionally, Prime Minister Sanae Takaichi’s plans to increase the fiscal deficit could further stoke inflation, putting downward pressure on the yen.^[Fortune]

Robin Brooks, a senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, warned that Japan’s massive debt—now 240% of GDP—is the root of the problem. He argued that the BOJ’s policy of suppressing bond yields to keep debt interest costs under control masks the risk of a debt crisis, giving investors little reason to stay in Japan, which in turn puts depreciation pressure on the yen.^[Fortune]

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