Global markets are once again in an aggressive uptrend! World crude oil prices continued their strengthening momentum after the United States (US) confirmed that they had launched airstrikes on Iran for the second consecutive day.
Brent crude oil surged to near $78.80 per barrel as investors worried that this latest conflict would further cripple the world's most critical maritime route, the Strait of Hormuz.
According to an official statement from the US Central Command on social media, the additional attacks were launched to cripple Iran's ability to continue threatening freedom of navigation in the Strait of Hormuz.
Bond Market Starts to Shock, Rate Hike Expectations Accelerated to October!
If earlier this week the financial market was relatively 'relaxed' and did not take US-Iran tensions seriously, today's situation has changed 180 degrees. The resurgence of war risks and the surge in oil prices have reignited the fire of global inflation.
As a result, the bond market and US interest rate expectations continued to experience market shocks:
US 2-Year Treasury Yield: Jumped 5 basis points to 4.23%, nearing its highest level last month. These bonds are highly sensitive to central bank policy projections.
US 10-Year Treasury Yield: Increased 4 basis points to 4.59%, the highest level since late May.
Gold Assets (XAU/USD): Started to stabilize and move horizontally after recording three consecutive days of declines.
Market Sentiment: Due to the threat of oil inflation, money markets on Wednesday suddenly accelerated their bets on the next Fed interest rate hike date to October, compared to the original expectation of December!
Fed June Meeting Minutes: Inflation Still 'Haunting'
The collapse of the US-Iran ceasefire plan is feared to trigger a chain of price growth, forcing the Federal Reserve (Fed) to act more aggressively (hawkish).
The newly released Fed meeting minutes for June show:
Fed Officials Ready to Raise Rates: Several Fed officials revealed in the meeting that there is actually a solid basis for raising interest rates, although they ultimately agreed to keep them on hold for the time being.
Focus Shifts to Inflation: Overall, Fed committee members (FOMC) stated that their concerns about inflation are now much greater than concerns about the labor market.
One thing is certain, the Fed's future policy is now very dependent on the political situation in the Middle East. If we examine the projections (forward guidance) from the minutes, the Fed is evaluating various contingency scenarios and will not commit to any firm decision until the latest economic data provides a clear indication.
The market is currently in Risk Off mode (cautious). The US bombing of Iran for two consecutive days has changed the market narrative from expectations of a decrease in interest rates to the threat of a further increase in interest rates due to oil inflation.
