Markets ended the week lower as investors assessed the impacts of the Middle East fighting. Over the course of the week, energy prices experienced large swings, resulting in heightened financial market volatility. Bond yields rose sharply, with the 10-Year Treasury yield climbing 0.15% to end the week at 4.28%, a seven-week high, pressured by inflationary concerns stemming from rising energy prices.
On Monday, oil prices briefly reached $120, as energy markets continued to grapple with what is being described as the largest ever oil supply shock. Prices retreated later in the day following remarks by President Trump that the war was “very complete,” sending oil prices back down to nearly $80. Prices rebounded to ~$100 by the end of the week, as Iran’s new Supreme Leader pledged to keep the Strait of Hormuz closed to all ships and the country’s military attacked multiple vessels in the Persian Gulf. The rise in prices came despite the International Energy Agency (IEA) announcing that all 32 member countries agreed to release 400 million barrels of oil from their strategic reserves, including 172 million from the US. According to Citi, the current closure of the Strait of Hormuz is preventing ~16 million barrels per day of crude and oil products from reaching customers.
This week, investors will turn their attention to the Federal Reserve as it meets to discuss interest rate policy. Of particular interest will be Fed Chair Jay Powell’s post-meeting press conference and any insights he provides about how the Middle East fighting might impact the timing of future rate cuts. Prior to the fighting, markets were pricing in an ~80% chance of at least two rate cuts prior to year end and just a 3% chance of no rate cuts. Now, markets are pricing in a 67% chance of one or more rate cuts prior to year end and a 33% chance of no rate cuts.
