Geopolitical tensions shake markets as 'higher-for-longer' fears resurface

March has certainly arrived with a bang. Following the weekend’s escalation in the Middle East – involving the US and Israel attacking Iran – volatility is likely to remain high.

Market snapshot: Oil prices bid this morning

Alongside a mammoth 40% rally in European Gas prices yesterday, Oil gapped higher at the open, lifting prices by double digits, as Tehran effectively closed the Strait of Hormuz. Both WTI Oil and Brent Crude ended higher by 5.6% and 6.7%, respectively, at yesterday’s close, though buyers were on the front foot this morning.

Evidently, a prolonged closure of the Strait would be bad news for Oil prices; I have seen forecasts of north of US$100 per barrel should this materialise, though it is important to note that the current situation remains fluid and many scenarios are on the table.

While both Spot Gold and Silver caught an early bid – with the former inching closer to all-time highs of US$5,598 – Gold ended Monday largely unchanged, and Silver surprisingly fell 4.7%.

In the fixed-income space, despite a short-lived gap lower, US Treasury yields rose across the curve. Amid rising Oil and Gas prices, investors are beginning to trim Fed rate-cut expectations. Money markets now price in just 46 bps of easing for the year-end, down from 53 bps a week ago.

Across FX, the USD Index posted a solid 0.9% gain on the day, supported by safe-haven demand, but really found its footing after media outlets reported attacks on Oil plants in the Gulf. The EUR and JPY also took sizeable hits of about 1.0% versus the buck. It is all about Oil right now – Europe and Japan are heavily exposed to energy shortages and price hikes, hence their accelerated depreciation after the news of attacks on Oil plants.

In the equity space, however, major US benchmarks demonstrated surprising resilience and ended pretty much flat across the board. Earlier downside opening gaps triggered by the weekend’s US-Israeli strikes on Iran, and subsequent retaliatory actions in the Middle East, were met with buying. European Stocks were less robust, with the Stoxx Europe 600 diving 1.6% and France’s CAC 40 down 2.2%. Overnight, we saw a similar picture in Asian equity markets: Japan’s Nikkei 225 slid 3.0%, while South Korea’s KOSPI erased more than 7.0%!

US Manufacturing prices surge to their highest level since mid-2022

On the macro front, the US February ISM Manufacturing PMI landed yesterday and came in at 52.4, above the 51.8 median estimate, though below the 52.6 reading in January. The prices paid sub-index proved interesting reading, jumping 11.5 points to 70.5 from 59.0, marking its highest level since mid-2022. According to the report, the surge was primarily driven by increases in steel and aluminium prices, as well as tariffs on many imported goods. Tariff-driven inflation creates a particularly challenging situation for the Fed, as it effectively imposes price rises from outside the country.

Today’s calendar

While the geopolitical situation remains front and centre for markets, the February eurozone CPI inflation report lands at 10:00 am GMT today, closely followed by the UK spring statement at 12:30 pm. Additionally, three Fed officials will hit the wires, including Williams, Schmid, and Kashkari.

YY headline eurozone inflation is expected to match January’s print at 1.7%, remaining under the ECB’s 2.0% target and marking the slowest pace since late 2024. YY core inflation, however, is forecast to tick higher to 2.3% from 2.2%. On the whole, I am not expecting this report to move the market’s needle, with the ECB firmly on course to remain on hold this year.

UK Chancellor Rachel Reeves is not anticipated to deliver any surprises today, making this a relatively low-key affair with no major fiscal changes on deck. What investors will be watching, however, is the updated OBR forecasts – if this presents a dismal picture of growth, we could see GBP weighed down.

In terms of the upcoming Fed speak, markets will likely be watching for further hawkish pivots, particularly amid rising Oil and Gas prices.