Global markets experienced significant positive changes on recent news that geopolitical tensions may not impact the flow of oil as anticipated. Despite the U.S. injecting itself into the Iranian-Israeli conflict, it is expected that Iran will maintain the global crude distribution chain, a move beneficial not just to economies across the globe, but also to their own due to their dependence on oil sales. Investors who initially responded negatively to the conflict were buoyed by this optimistic outlook causing a surge in U.S. stocks.
On Monday, in particular, indices showed a promising upswing with S&P 500 experiencing a 1% increase. Prior to this, notable fluctuations in stock prices were observed due to anxieties about potential escalation in the military confrontation. Similarly, the Dow Jones and Nasdaq composite also followed suit, reporting a growth of around 0.9% each.
Curiosly the oil market experienced a markedly different trend. Prices surged by as much as 6% at the commencement of trading on Sunday, reflecting the initial concerns of investors following the U.S. led airstrikes. Yet, this rise in prices was swiftly undone, shifting into a steep decrease as the market reassessed its measurements based on Iran’s potential response to the affront.
Significant drop in oil prices was seen after Iran made an announcement about their missile strike on the Al Udeid Air Base in Qatar, a base utilized by American armed forces. The directed retaliation could be interpreted as an intention to level with the U.S. in rather than escalate the situation. The quantity of bombs said by Iran to have been used were exactly the same number that the U.S. reportedly used against the Iraninan nuclear sites over the weekend.
Most importantly, for international financial markets, oil – a critical asset, appeared not to have been a target in Iran’s retaliation. Since the start of the Israeli-Iranian conflict, there has been a persistent fear that global oil supplies could be severely impacted, resulting in increased prices for not only crude oil but gasoline and other oil-dependent commodities.
Iran’s role as a crucial oil provider makes it capable of influencing global oil supplies, mainly if it decides to blockade the Strait of Hormuz, a major oil transport route. This waterway singlehandedly services about 20% of the world’s daily oil requirement on marine transports.
However, multiple market experts have opined that Iran might not resort to such methods as it could prove self-destructive due to their reliance on the strait for oil exports, largely towards China, and the revenue generated from these transactions. Positive speculation is being maintained around the situation potentially proving a brief encounter rather than a protracted war.
Still, some apprehension exists about Iran’s future actions. Notable concerns have been raised that Iran’s decisions may not strictly adhere to strategic logic, and there could be instances of irrational or emotionally-driven retaliation. Political dynamics could be a significant driver for such actions.
The assumption that the Strait of Hormuz could be shut off in its entirety underpins the prediction that oil prices would skyrocket to $120-$130 per barrel, says analyst Andy Lipow. The consequence would be heftier costs for all goods transported by truck. Furthermore, it could complicate matters for the Federal Reserve’s decisions on adjusting interest rates.
The Federal Reserve has been hesitant to reduce interest rates this year, primarily due to the uncertainty around the impacts of President Donald Trump’s tariffs on the economy and inflation. Inflation has remained somewhat under control, till now. But any surge in oil or gasoline prices may add detrimental pressure.
This could lead to the Federal Reserve postponing any intended rate cuts since such actions can add to inflation, whilst also giving a boost to the economy. The bond market showed a softer tone after Fed Governor, Michelle Bowman, made statements suggesting she might be in favor of rate cuts during the meeting scheduled next month if ‘inflation pressures remain contained.’
As a result, the yield on the 10-year Treasury fell slightly to 4.33% from the previous 4.38%, and the yield on two-year Treasury notes, which is a better barometer for Fed expectations, also slipped from 3.90% to 3.84%.
In the world of individual stocks, Tesla, under the leadership of Elon Musk, saw a robust 8.2% jump, singlehandedly boosting the S&P 500. The driving force behind this upswing is Tesla’s recent trial of a small fleet of autonomous taxis in Austin, Texas.
In contrast, Hims & Hers Health experienced a steep 34.6% decline after Novo Nordisk decided to cut ties relating to the sale of the popular Wegovy obesity drug. This decision also led to a 5.5% decrease in Novo Nordisk’s U.S. traded stock. Meanwhile, international stock markets exhibited a modest downturn across Europe and mixed results in Asia, with France’s CAC 40 and Hong Kong’s Hang Seng experiencing a 0.7% change, but in opposite directions.