First Light News: Gulf Tensions Igniting Risk-off Monday

Oil Prices Spike as Hormuz Remains Precarious

The geopolitical risk premium is being priced into oil right now and is front and centre this morning.

Brent crude and WTI benchmarks are up sharply, testing space north of their respective 200-day SMAs. This, of course, prompts questions about the state of the Strait of Hormuz – traffic data for the waterway this morning show it is very thin, with the US saying it is open and Iran saying it is closed!

Inflation Push

The inflation push is also evident, as rising energy costs revive fears of price pressures. The OIS market now prices in around 32 bps of Fed tightening by year-end – up from 17 bps a week ago. In fixed income, this has sent US Treasury yields higher across the curve, pushing the front end – the 2-year yield – to highs not seen since early last year.

We also get the June US CPI inflation report tomorrow – the key risk event this week – expected to ease to 3.8% from 4.2% in May for the YY headline print, with YY core estimated to remain unchanged at 2.9%. I believe the focus will be on the core measures as investors watch for signs of second-round effects. If YY core comes in at or above 3%, it would not only mark a new cycle high but also match the market’s maximum estimate.

If the headline also comes in higher than expected, this could swing the pendulum towards a Fed hike in September or October and provide the USD with some impetus. However, something to keep an eye on is that positioning data shows the USD is overstretched to the upside, so a broad miss could also trigger an unwind of these longs.

FX and Stocks: USD Bid and Gold Under Pressure

In the FX space today, the USD index picked up a modest bid, pushing it higher against most of its G10 peers and weighing on precious metals. With real yields rising – making non-yielding assets less attractive – spot gold is down around 1.5% this morning and is eyeing YTD lows of US$3,942.

Finally, global equities are on the back foot this morning amid escalating tensions in the Gulf. Asia-Pac shares took a beating, with South Korea’s Kospi bearing the brunt and plunging as much as 9%, partly technical after SK Hynix’s blockbuster US listing debut last Friday sent its shares higher before they pulled back sharply in Seoul trading. Closer to home, European and US equity index futures are trading in the red, pointing to a softer cash open.

Earnings Season Kicks Off

Earnings season also starts this week, with several US banks reporting tomorrow, followed by chipmakers and Netflix later in the week. This is a real test of whether corporate profit growth can continue to justify the AI-driven rally amid rising input costs and jittery risk sentiment.

Written by FP Markets Chief Market Analyst, Aaron Hill