Tensions between the US and Iran have escalated as we move through Monday. Donald Trump has said that Washington is reinstating a naval blockade in the Strait of Hormuz and will charge a 20% fee on all cargo shipped through the Strait. This is expected to start immediately, and Trump’s justification for the new toll is ‘fairness’.
Only last month US authorities said that it was illegal for countries to charge tolls on international waterways, so this threat may disintegrate when it hits reality, however, the heightened tensions means that those hoping for a quiet July are in for a shock.
The oil price is higher by nearly 6% today, and Brent crude is trading above $80 per barrel. Stocks are sliding in the US, led by chip stocks. SanDisk is lower by 11% today, while Marvell Technology and Arm Holdings are lower by 7% a piece. Government bond yields have also been affected, with further large gains for UK yields, the 10-year yield is higher by 10bps and is fast approaching 5%. The 10-year Treasury yield is higher by a more moderate 5bps, and French 10-year yields are up by 15bps.
The sharp move higher in the oil price, has caused a recalibration in interest rate hike expectations, there is now a 40% chance of a hike from the Federal Reserve at this month’s FOMC meeting, this is up from 20% earlier in July. Likewise, higher oil prices means greater inflation risks and the BOE and the ECB are also likely to be watching out for any second round inflation effects from the latest bout of tension in the Middle East.
The latest news from the Fed is unlikely to be risk positive. Fed governor Chris Waller has said that a rate hike should be on the table if tomorrow’s CPI report comes in hotter than expected. This suggests that there is at least one Fed member who could vote for a rate hike in the coming weeks. Waller also added that there is no point in talking tough about inflation without action. Is this a sign that he is not the only one preparing to vote for a rate hike? Perhaps the new chair Kevin Warsh is feeling similar? We could find out tomorrow when Warsh testifies to Congress.
Once again, gold is selling off as the war in Iran escalates. The gold price is down 2.5% today and is testing the $4000 level. It appears that any escalation in the war is bearish for the gold price, especially when yields rise and the expectations grow for Fed rate hikes. These are not the conditions that benefit the yellow metal, and if geopolitical risks continue to rise then gold is at risk from falling below the $4000 per ounce level.
The stock market is also lower today as the oil price pushes higher. The Nasdaq looks much weaker than the S&P 500 right now and is selling off more sharply. The outlook for the Nasdaq and the AI trade will now depend on the oil price and the 10-year US Treasury yield. It currently stands at 4.61%. Another blockade of the Strait of Hormuz and a ramping up of the war in Iran could push 10-year Treasury yields back towards 5%. If this happens, expect more pain for the stock market bulls and a further capitulation in the gold price.
For now, market sentiment remains in the hands of Donald Trump. If he backtracks on his threat to blockade the Strait and charge ships a toll, then sentiment could reverse and stocks and gold may recover quickly. However, if the blockade is reinstated, then the oil price could get back towards the $100 per barrel level.
Chart 1: Brent crude oil, the Donald Trump effect
Source: XTB
Gold Extends Losses to 3% Following Comments from Fed's Waller 🏛️
🚨Trump proposes 20% toll on all Hormuz cargo
BREAKING: Trump reimposes a blockade on the Strait and announces a 20% “toll” on traffic passing through this route 🚢
US OPEN: Capital is once again fleeing “memory stocks”; Wall Street under pressure at the open 🚨
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