Oil climbs and bonds buckle amid US-Iran tensions

We are dealing with a familiar story this morning, with oil prices bid and bonds trading lower amid a notable flare-up in the Middle East.

US-Iran ceasefire?

Overnight witnessed the US launch additional strikes on Iranian soil in response to Iran attacking vessels in the Strait of Hormuz. This places a bold question mark on the MoU and, of course, the possibility of reaching a longer-term peace agreement.

I think as long as tanker traffic continues to flow through the Strait, markets will not treat the recent back-and-forth as a full-blown escalation. As you would expect, this has seen oil benchmarks – Brent crude and WTI – catch a bid and shake hands with their respective 200-day SMAs. Intraday, we are seeing prices gradually pull back this morning.

Bonds selloff and Fed minutes offer hawkish undertone

Away from oil, bond markets are the other story this morning. Global bond yields rose on Wednesday, and extended into Asian trade, with government debt in Japan, Australia and New Zealand under further pressure. US Treasuries are steadier right now, though two-year yields are hovering near their YTD highs.

One of the drivers behind US Treasuries' bear steepening is a rethink on the Fed. The minutes from the 16-17 June Fed meeting revealed the decision to leave the FFR on hold at 3.50-3.75% was unanimous, though with hawkish undertones. The minutes showed members flagged elevated inflation driven by ‘strong AI-related demand, the conflict in the Middle East, or the effects of tariffs’, and added that ‘in the context of strong labour market conditions’, the Fed would likely need to increase the FFR in order to bring inflation back to the 2% target. A few members even saw a case for hiking at the June meeting but opted to hold.

How much more likely is a Fed rate hike with higher oil prices? The minutes showed little to suggest that they will not hike, and the OIS curve is almost fully pricing in a 25-bp increase by year-end. Next week’s US June CPI inflation report will be an important release; if the core measures come in above forecasts, this could swing the pendulum toward a hike in October or even September, keeping the USD supported.

Equity markets mixed

Stocks in Asia fluctuated overnight, offering a mixed scoreboard. Investors are juggling a few things this morning; on the one hand, we have higher oil prices, while on the other, the question remains how durable the AI rally is. South Korea’s KOSPI ended modestly higher at 0.2%, while Japan’s Nikkei 225 added 1.7% and Australia’s ASX 200 dipped around 0.5%.

In the US, Wednesday’s session saw the S&P 500 slip about 0.2%, the Dow fall over 1%, while the Nasdaq actually eked out a small gain as chipmakers rallied – Broadcom and Nvidia both had strong days, helped along by news of an expanded Apple-Broadcom chip agreement.

Day ahead

As for the day ahead, the calendar is pretty thin, with only weekly US jobless claims and existing home sales data on deck. Additionally, Fed officials Logan and Williams are speaking, which could move yields further given how sensitive markets are to rate signals right now.