- Last week, the US heavily attacked Iran.
- Trump announced that the US will resume its blockade of Iranian ships.
- Market participants are assigning a 52% chance that the Fed will hike rates twice or more this year.
Equities fell on Monday as tensions in the Middle East worsened after the US announced it would reinstate its blockade on Iranian shipping. As a result, oil prices jumped, and expectations of a Fed rate hike increased. At the same time, market participants are looking forward to the US CPI report coming out later in the day.
Stocks fell at the start of last week when the new conflict between the US and Iran intensified. Reports of tankers being hit near the Strait of Hormuz caused panic and uncertainty about the ceasefire and future talks. Soon after, the US heavily attacked Iran, hitting several targets in the country. Iran responded by saying it had closed the Strait of Hormuz.
However, as the week came to a close, stocks rebounded amid hopes for peace. Reports revealed that Iran reached out to the US to end the conflict. Nevertheless, Trump said their ceasefire deal was over.
Sentiment shifted again this weekend as Iran retaliated by hitting US facilities in various Gulf countries. Meanwhile, Trump announced that the US will resume its blockade of Iranian ships passing through the Strait of Hormuz.
“We are reinstating THE IRANIAN BLOCKADE, so named because it is only stopping Iran’s ships or customers from entering or leaving,” Trump said in a post on Truth Social.
The escalation of the conflict has driven oil prices higher. At the same time, uncertainty about the futures has hurt risk appetite. Traders are rushing to safer assets and dumping the riskier ones, including equities.
Furthermore, a surge in oil prices has brought inflation concerns back. Inflation worries will again put pressure on the Fed to hike borrowing costs. At the moment, market participants are placing a 52% chance of the central bank hiking rates twice or more this year. As the conflict intensifies, this likelihood will increase. High borrowing costs are bad for business and would therefore weigh on equities.
Earnings estimates (Source: Bloomberg)
Market participants are also preparing for earnings from major companies like JPMorgan and Bank of America. Analysts expect another upbeat earnings season.
Additionally, the US will release its monthly consumer inflation report later today. This will further shape the outlook for Fed monetary policy.
