Markets began the week reacting to a renewed escalation in the Middle East that has pushed crude prices sharply higher and left investors and policy makers reassessing near-term risk. Brent crude crossed the $116 per barrel threshold and U.S. crude rose above $102 per barrel on Monday, though both benchmarks later pulled back a little and remained at elevated levels.
The upward trajectory in oil extends recent late-week gains and marks Brents move toward what was described as its biggest ever monthly rise. In a signal that traders are growing more pessimistic about a prompt end to hostilities, three-month Brent futures moved above $100 per barrel, an indication of concern that the energy shock could persist and feed into inflation for a sustained period.
Expectations of a near-term de-escalation were undermined over the weekend after Iran-affiliated Houthi forces in Yemen entered the conflict and after comments from President Trump suggesting that U.S. forces could move to take Kharg Island, Irans main oil export hub. At the same time, statements from Washington offered mixed messages: the president continued to speak about the possibility of a peace deal with Tehran even as military activity and troop deployments increased.
Asian markets were particularly sensitive to the jump in crude. Japans Nikkei index fell 2.8% on Monday, extending its losses for March to nearly 13%. South Koreas KOSPI dropped by nearly 3%, leaving it down almost 9% for the month. The swift moves in regional equities contrasted with somewhat firmer trading in Europe, where shares rose modestly in early trade, and with Wall Street futures which were up before the U.S. open, perhaps comforted by the apparent prospect of talks between Washington and Tehran.
The dollar remained on the front foot, sustaining momentum that put it on track for its largest monthly gain since last July. U.S. currency strength contributed to pressure on other major currencies, most notably the Japanese yen, which slid past the 160-per-dollar threshold - a level often viewed as a trigger for intervention by Japanese authorities. Japanese currency official Atsushi Mimura warned on Monday that "decisive measures" may be required to halt further weakening of the yen.
Given the persistence of the energy shock, policy makers are moving to evaluate options. G7 finance ministers, foreign ministers and central bankers are scheduled to meet virtually today to consider measures to blunt the impact of rising energy costs. Market participants can also expect commentary from the Federal Reserve, with Fed Chair Jerome Powell and New York Fed President John Williams both due to speak, potentially offering clues about how the central bank sees the energy-driven inflationary impulse.
European inflation data will offer an early read on the pass-through of higher energy costs. Germanys consumer price index for March is due for release and will be watched closely to gauge whether elevated oil prices are translating into faster consumer price growth across the bloc.
Diplomatic developments remain uncertain. Pakistan has said it is preparing to host "meaningful talks" between Tehran and Washington, though it is unclear whether either side has agreed to attend. At the same time, reports of additional U.S. troop deployments and of possible ground operations in the region have continued to circulate, leaving the crisis at a delicate inflection point. Whether the recent flurry of activity ultimately leads to further escalation or paves the way for de-escalation is not yet clear.
Chart of the day
U.S. pump prices showed a dramatic monthly rise in March, jumping by about one third as the Iran-linked attacks and related energy shock unfolded. That move ranks among the largest monthly increases on record. Average regular unleaded prices are now hovering just under $4 per gallon.
Events to watch today
- U.S. Dallas Fed business survey (10:30 AM EDT)
- Speeches by Federal Reserve Chair Jerome Powell and New York Fed President John Williams
- Virtual meeting of G7 finance ministers, energy ministers and central bank officials
- Release of German CPI figures for March (timing as scheduled)
With energy markets driving a notable repricing of risk, traders, corporate treasurers and policy makers will be monitoring incoming data, public commentary and diplomatic signals closely. The immediate consequences are clear in higher fuel costs and volatile equity and currency markets, but the longer run trajectory will depend on developments in the region and on how quickly trade and supply concerns are resolved.