Global markets entered the week on edge as escalating tensions in the Middle East pushed oil prices sharply higher and raised new questions about the Federal Reserve’s path on interest rates.
Brent crude climbed more than 7 percent in early trading Monday after reports of retaliatory strikes between Israel and Iran over the weekend.
The price surge added fresh volatility to an already uncertain macroeconomic environment, just two days before the Federal Reserve is expected to issue its latest decision on interest rates.
U.S. equity futures, including contracts tied to the Dow Jones Industrial Average, initially dipped in overnight trading before recovering modestly by morning. Dow futures edged up 0.15 percent by midday, while S&P 500 and Nasdaq futures showed similar gains.
The rebound in equities reflected a tenuous sense of calm, but analysts warned that markets remain fragile amid rising oil costs and inflationary pressures.
“If this conflict spills into a broader disruption in the Strait of Hormuz, we’re looking at a very different inflation outlook globally,” said Michael Farr, chief market strategist at Farr & Associates. “That directly complicates what the Fed may have hoped to telegraph this week.”
Sunday night’s aerial clashes between Israeli and Iranian forces stoked fears of a wider regional conflict.
While early reports suggest the hostilities were contained to strategic military targets, the specter of escalating retaliation looms large.
Energy markets responded immediately. Brent crude futures surged to over $97 a barrel at one point before settling closer to $93—a level not seen since early April. West Texas Intermediate (WTI) crude also rallied past $90.
The price movements raised red flags for policymakers and investors alike, particularly as energy costs feed directly into consumer inflation. The Federal Reserve’s next meeting, scheduled for Tuesday and Wednesday, will likely reflect those concerns.
A Fork in the Road for the Fed
The central bank is widely expected to leave its benchmark interest rate unchanged at 4.25 to 4.50 percent.
But market participants will be watching closely for the Fed’s updated economic projections and so-called “dot plot,” which indicates where officials expect rates to head in the coming months.
Just last week, softer-than-expected inflation data had raised hopes that the Fed could begin easing rates as soon as September. But the oil rally may disrupt that narrative.
“Energy is the one input that can ripple through the entire economy,” said Lisa Chan, a senior economist at GlobalView Capital. “If oil prices hold near $100, the Fed will have no choice but to tread very carefully—even if core inflation is improving.”
Volatility Below the Surface
While stock futures rebounded Monday, volatility measures remained elevated. The CBOE Volatility Index (VIX) held near 17, up from 14 a week earlier. Bond yields rose slightly, with the 10-year Treasury touching 4.36 percent—another sign of the market’s cautious tone.
Some sectors appeared to benefit from the geopolitical jitters. Energy stocks rallied in premarket trading, while gold prices advanced as investors sought safe havens.
The next 48 hours will be crucial for traders, economists, and policymakers. If tensions in the Middle East escalate further, the ripple effects could derail fragile progress on inflation and force central banks into a defensive posture.
For now, markets are in a holding pattern.
The Fed’s language on Wednesday—and any indication of concern over rising energy prices—could swing sentiment sharply in either direction.
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