Wild fluctuations

Rare are days in the markets when you get this much volatility. Asian indices were deeply sold, while US and European futures were down by 2–3% as US crude prices had spiked to $120pb on escalating conflict in the Middle East. But crude spent the day retracing gains and ended Monday’s session more than 7% lower – near the $85pb level.

The catalyst was the announcement that the G7 countries could release their strategic reserves. The latter really helped pour cold water on the crude rally. European indices recovered early losses and US indices ended the day in the positive on mounting speculation that the Iran war would end ‘soon’. How soon? No one knows. But not ‘this week’ according to Trump. But the Nasdaq gained up to 1.38%. Bulls are impatient to trigger a fresh rally – without a dip this time. Why bother waiting?

The problem is that the strategic reserves the G7 said they could release amount to about 300–400 million barrels reportedly. Global oil demand is about 100 million barrels per day. So we’re talking about roughly 3–4 days of global demand. That’s not much.

Plus, Middle East producers are now cutting oil production as storage facilities fill up… and Saudi Arabia is reportedly selling more oil for immediate delivery whereas they normally prefer long-term contracts – meaning they’re trying to feed the market as fast as they can.

Other – more noteworthy – news is that Saudi Arabia is rerouting its crude toward Yanbu in the Red Sea, from where it could export up to 5mbpd (Saudi produces around 10mbpd and exports roughly 7mbpd of it). The latter wouldn’t be a perfect solution but could help. If things go really badly, Russian oil could re-enter the circuit.

But the latter measures may not pull oil prices back to pre-war levels: US crude was trading below $68pb before the Iran operation. It could stay above $80pb until there is a clear resolution.

Of course, market pricing changes by the minute, but yesterday’s spike in oil prices shook European Central Bank (ECB) and Bank of England (BoE) expectations quite dramatically, as rising oil prices combined with a stronger US dollar would immediately push inflation higher in Europe.

As such, swaps were pointing to two full 25bp rate hikes from the ECB this year, compared to just one rate hike last Friday. Meanwhile, BoE expectations swung from rate cuts to a potential rate hike as inflation in the UK – which is very sensitive to energy prices – could end up more than double the BoE’s pre-war expectations, according to ING forecasts. They see inflation nearing 5% in Q3, versus earlier expectations that inflation would ease toward the BoE’s 2% target by that time.

The funny thing is that BoE hike expectations were valid only a part of the session. By the time the session ended, the rate hike chances had fallen back to neglectable levels, leaving behind crazy volatility and deep uncertainty about what’s to come.

Pricing in FX reflects the volatile expectations – of course. The EURUSD tested and rebounded from the 1.15 mark yesterday, but the move was mostly about the US dollar gaining and then giving back gains as the session moved from fear to greed. Same with Cable: the pair dipped below 1.33 at the open and ended the session above 1.34. The USDJPY approached the 159 level – here we’re very close to levels that spook officials and could trigger at least a verbal intervention to slow the yen depreciation. But at the end of the day, it all comes down to the US dollar – and the war headlines and energy prices.

So this uncertainty will continue. The fact that investors overreact to every piece of news without questioning feasibility adds another layer of difficulty when navigating markets. Part of yesterday’s optimism came after Trump said the war would end ‘soon’ and that the US was ahead of schedule. Concretely, however, the conflict in the Middle East continues at full speed, political developments are not pointing to a near-term resolution, and there is little clarity about the US plans in this war – even officials’ statements sometimes contradict each other.

As a result, crude is rebounding this morning – it was up around 5% when I first came to my desk this morning and is now up by less than 3% at the time I write this sentence. The price action will depend on geopolitical developments. The best thing to do is hold on and avoid reacting in panic if you have the possibility to do so.

Speaking of inflation, the world is facing energy-led inflation. Fertilizer prices are rising – as we discussed in detail yesterday – threatening to push global food inflation higher as well. Then there is memory chip inflation, which will push the prices of PCs, cars and gaming consoles higher. How high? It depends on companies’ ability to pass these costs onto customers. Bloomberg reports that in some cases DRAM prices – the most common working memory in computers – have surged by around 700%. So we’ll see.

In a rare piece of good news in yesterday’s session, HPE gave a better-than-expected revenue outlook when it released earnings, and its stock jumped more than 3%, while Oracle – a barometer of AI infrastructure spending risks – is due to announce earnings today after the bell.

Investors will focus less on the headline numbers and more on whether Oracle can confirm that AI-driven cloud demand remains as strong as markets believe. The key metrics will be growth in Oracle Cloud Infrastructure (OCI), the size of its AI-related backlog and capex guidance for new data centers. Strong OCI growth and rising backlog would signal that companies are still aggressively spending on AI computing power—reinforcing demand for chips from Nvidia and supporting the broader AI infrastructure trade. But if cloud growth slows or capex rises without clear demand visibility, investors may question whether the AI investment boom is running ahead of real revenue and revive worries that the industry is taking on too much leverage.