You have no doubt noticed it: prices at the pump have literally surged in recent days. The effects of the closure of the Strait of Hormuz naturally explain this rise, which is also starting to weigh on equity markets. Historically, when oil approaches new highs, the correlation with equities often turns negative: the higher oil goes, the more equities risk falling. The reason is simple: more expensive energy = higher inflation, reduced purchasing power, and less likelihood of rate cuts by central banks. Long-term yields have taken note, rebounding sharply since the start of the conflict in the Middle East, with bonds failing to play their role as a shock absorber. Gold has not, either. It is worth noting that, amongst the assets affected, US equity markets have so far been the least hit by the crisis. In contrast, emerging markets and Europe are suffering not only from their energy dependence but also from the stronger dollar. In a sense, it is a double whammy.
Reasons for hope
At this stage, the market is of course watching oil, which briefly neared the $120 mark for both WTI and Brent. Interestingly, we are facing a backwardation situation in which the price of near-dated futures contracts is higher than that of futures for a more distant maturity. This setup generally coincides with a peak in the market. As a result, if the conflict eases or if negotiations emerge, oil could fall quickly, triggering a rebound in risk assets. Historically, many regional conflicts have coincided with market lows when oil hits a peak.
At the same time, the parties involved would benefit from limiting the duration of the conflict. First, Iran needs to reopen oil exports, its main source of hard-currency inflows. Second, China wants to maintain its imports. Finally, Donald Trump has every incentive to avoid an inflation shock ahead of the midterm elections if he wants to preserve his majority and allow the Federal Reserve to cut rates.
Technically, many markets are also at a crossroads. The dollar index is sitting on a symmetry level at 99.70, while horizontal resistance is around 100.30. At the same time, the EUR/USD is near its lows from last November at 1.1485/75. The Euro Stoxx 50 is also just a few percent off its 2025 highs at 5515/5450, while the S&P 500 is approaching its 200-day moving average, with support around 6600/6550. Signs of capitulation will therefore be watched for to call time on the bearish phase.
