Global financial markets continue to exhibit highly volatile movements! After recording an upward rally following successive airstrikes by the United States on Iran, Brent crude oil prices erased their initial gains by declining 0.4% to trade below $78 per barrel.
This decline in oil prices gave some breathing room to the US bond market (Treasurys) which recorded a rebound. Previously, the bond market was hit by a severe panic sell-off on Wednesday after investors bet that the Federal Reserve (Fed) would have to raise interest rates to curb oil inflation.
Looking at this situation, the US 10-year bond yield (10-Year Treasury Yield) was detected to decline two basis points to 4.56%, while safe haven assets such as gold and silver continued to record a strengthening.
Chaos Trade is Back! Inflation Risks Force World Central Banks to Prepare
The resurgence of conflict in the Middle East has immediately revived the Chaos Trade strategy, a situation where investors flock to oil, gold, and safe-haven assets due to geopolitical fears.
The minutes of the June Fed meeting reveal important things:
Some Members Want to Raise Rates: Some Fed policymakers have begun to see the need to raise interest rates to control inflation expectations.
Betting Date Accelerated: With the US-Iran ceasefire collapsing completely this week, money markets have accelerated expectations for the Fed's next rate hike from December to October!
It's not just the Fed that's worried, fixed income fund managers are now expecting a wave of interest rate hikes to occur en masse globally by the end of this year involving the Fed, ECB (Europe), BOE (UK), BOJ (Japan), as well as two more hikes from RBNZ (New Zealand).
Strait of Hormuz Traffic 'Paralyzed' to the Full Throttle, Ships Afraid to Use US Route
Despite the technical decline in crude oil prices, the physical situation in the Strait of Hormuz is actually in a very worrying state:
Traffic Almost to a Stop: The world's most important energy maritime route was reported to be almost completely paralyzed on Thursday after a series of US military attacks.
Boycott of US Route: Ship tracking data shows that the remaining logistics movements only dare to use the northern corridor route that has received approval/permission from Iran. Meanwhile, the Oman corridor route supported by the US military is reported to be quiet with no activity because ship owners fear being targeted by missiles.
For now, crude oil commodities have returned to being the 'central driver' that determines the direction of prices across various asset classes (cross-asset pricing).
The bond and commodity markets are in a very tense psychological war phase. If the issue of the paralysis of the Strait of Hormuz continues and pushes oil prices back up again, it will drag along with inflation expectations and US bond yields. This situation will definitely put the Fed in a very uncomfortable position!
Do you think the current Brent oil price below $78 is just a temporary 'rest' before skyrocketing again, or is the market actually starting to get tired of Trump's threats? Drop a comment below!
