- Middle East tensions escalated this week after two tankers were hit near the Strait of Hormuz.
- Iran reached out to make a deal after the US hit several targets in the country.
- Market participants are looking forward to next week’s inflation numbers.
Interest futures recovered on Friday as market participants hoped for a de-escalation of tensions between the US and Iran. At the start of the week, the countries exchanged fire, causing panic and concerns about a full-blown war. At the same time, Trump said the ceasefire deal with Iran was over.
Uncertainty hit markets last week when reports revealed that the US and Iran were exchanging fire despite great progress in negotiations. Moreover, it came soon after the two had signed a deal to extend their ceasefire by 60 days and continue talks.
The tensions escalated this week after two tankers were hit near the Strait of Hormuz on Tuesday. The US retaliated quickly, hitting many targets in Iran. At the same time, Trump threatened to reimpose the US naval blockade on Iranian ports.
US yields and oil (Source: Bloomberg)
Meanwhile, Iran said it would no longer take part in talks. It also threatened to close the Strait of Hormuz. The result was a spike in oil prices, which rekindled inflation worries. Moreover, Fed rate hike expectations rose, sending Treasury yields higher and weighing on interest futures.
On Friday, interest futures recovered slightly after reports that Iran had reached out to make a deal with the US after Wednesday’s attack. Meanwhile, Trump told reporters that in case the war started again, there was no doubt that the US would win. Therefore, according to him, Iran has no choice but to make a deal.
“We have many ways we can win, but we’ve already won militarily,” Trump said. “They have very little left, and they want to make a deal so badly. They called a little while ago. They want to make a deal so badly. I just don’t know if they’re worthy of making a deal. I don’t know that they’re going to honor the deal. That’s the problem.”
The flare of hostilities has taken investors back to the uncertainty experienced before the deal signing. If the war starts again, it could erase all the progress made in recent talks. That would mean a surge in oil prices, inflation worries, and a rally in Treasury yields. Meanwhile, interest futures would resume their downtrend.
Market participants are also looking forward to next week’s inflation numbers, which will further shape the outlook for Fed policy.
