Markets reopened with a renewed focus on geopolitical risk after a sudden escalation in the Red Sea pushed oil sharply higher and sent shockwaves through bond and equity markets.
Overnight oil climbed about 7% and briefly topped $100 a barrel, driven by attacks on two Saudi oil tankers by Iran-aligned Houthi forces. The incidents prompted concerns that a key Middle East shipping route could be threatened, raising the prospect of supply disruption. President Donald Trump warned of "major military punishment," heightening fears that the conflict might broaden.
Investors were particularly sensitive because, as market participants noted, global oil inventories are already low. That backdrop raises the risk that an extended disruption to flows would boost inflationary pressures and unsettle inflation expectations - an outcome that central banks dread.
Brent crude has surged almost 40% so far this month. The commodity move hit fixed income markets hard, with long-dated U.S. Treasuries suffering the steepest selling. The 30-year Treasury yield is moving toward a 19-year high at 5.201%. The 10-year Treasury yield reached a fresh 18-month high of 4.7135% on Friday.
Rising yields and the prospect of renewed inflation have shifted market expectations for Federal Reserve policy. Traders now assign a roughly one-in-three probability to a rate hike from the Fed as soon as next week - a marked change from a week earlier - and are fully pricing in two rate increases by January of next year.
The combination of higher oil and higher rates exacerbated weakness across Asian equity markets. South Korea's KOSPI fell about 6% and Japan's Nikkei slipped 2.8%. Semiconductor stocks were unable to find relief even after Intel Corporation reported stronger-than-expected results that lifted its shares by over 4% after the bell.
Adding to the market strain, the AI investment trade is showing cracks. Investors have grown uneasy about the prospect of larger capital expenditure plans from major technology companies. Tesla shares plunged roughly 14% on Wall Street after the company recorded its first cash burn in two years. Alphabet's stock dropped about 7% as the Google parent reported it is burning cash while accelerating AI spending.
Despite the tumult, a proposal from President Trump to impose additional tariffs drew little market reaction, though observers questioned the economic logic of increasing costs for U.S. consumers through higher import prices.
Futures tied to the Nasdaq were slightly lower, and European markets were set for a steady open. Attention now turns to a slate of purchasing managers' index - PMI - flash readings for July in the U.K., the euro area and the United States, as well as U.K. retail sales for June. The U.S. PMI is expected to retain relative strength; any upside surprise there could lift the market-implied odds of a July Fed rate increase toward 50/50.
Key data points and events for the day include:
- U.K. retail sales for June
- Flash manufacturing, services and composite PMIs for July in the U.K., the euro area and the U.S.
The market narrative remains organized around two central themes: an energy-driven resurgence of inflation risk and the durability of the AI investment cycle. Both themes are influencing asset allocation decisions across commodities, bonds and equities as traders reassess interest rate paths and corporate cash-flow trajectories.
Market snapshot: Oil up roughly 7% to above $100 a barrel; Brent nearly 40% higher this month. 30-year Treasury yields approaching 5.201% (a 19-year peak). 10-year yields at 4.7135% (an 18-month high). Asian equity declines: KOSPI down about 6%, Nikkei down about 2.8%. Tesla down roughly 14%; Alphabet down about 7%; Intel shares up over 4% after earnings.