The dollar held its gains on Tuesday, while West Texas Intermediate crude steadied after a 6.3% jump in the prior session. European natural gas prices soared as Qatar shut the world’s largest LNG export plant. Gold was a touch higher, trading above $5,330 an ounce.Concerns that rising energy costs will send inflation higher and curtail Federal Reserve easing weighed on bonds. The yield on 10-year Treasuries climbed 10 basis points during the US session to 4.03%. Traders are now fully pricing in a first US rate cut for September, with bets on a third reduction in 2026 almost evaporating.
“There are more questions than answers right now,” said Chris Larkin at E*Trade from Morgan Stanley. “A stabilizing energy picture could have a positive ripple effect, while concerns about a longer-term disruption could have the opposite.”
As US-Israeli strikes on Iran reverberated across the Middle East, President Donald Trump insisted there was no fixed timeline, while Defense Secretary Pete Hegseth rejected the idea of an “endless” war with Iran.
Secretary of State Marco Rubio said the US military would step up its attacks against Iran and “the hardest hits are yet to come from the US military.” The next phase will be even more punishing on Iran than it is right now, he added.Amid the escalating conflict, the greenback climbed against all G-10 currencies Monday, leaving the yen trading around 157 per dollar. Australia’s 10-year yield jumped early Tuesday, as Reserve Bank Governor Michele Bullock said the central bank was “very alert” to the potential implications for inflation expectations from the Middle East conflict and is “well positioned” for a policy response if required.
The recovery in major equity indexes in the US from session lows suggests that, for now, the market views the conflict as a relevant geopolitical risk, but one that remains financially contained in the immediate term, according to Antonio Di Giacomo at XS.com.
Morgan Stanley strategists led by Mike Wilson see the conflict in the Middle East as unlikely to derail their bullish view on US stocks, barring a sharp and sustained surge in oil.
“In the end, the Iran military action should remove major uncertainty in the world, and the stock market is expected to have a relief rally as new, pro-Western leadership in Iran emerges and crude oil exports resume,” said veteran strategist Louis Navellier.