Markets were driven by an escalation in Middle East tensions, which pushed oil volatility and triggered a sharp repricing of inflation and rates. Bond yields rose, equities declined, and VIX remained elevated at 27, reflecting sustained volatility.
Key Themes
- Geopolitics Driving Volatility and Risk-Off: The escalation in the Iran conflict, including disruptions to the Strait of Hormuz, pushed oil prices sharply higher and increased market uncertainty. This was reflected in a rise in VIX, indicating elevated risk aversion, although moves remained orderly rather than disorderly.
- Inflation Shock Repricing Rates: Higher oil prices and firm upstream inflation data drove US 10Y yields toward ~4.4%, as markets pushed out rate-cut expectations. The narrative has shifted from easing to “higher-for-longer”, with inflation risks dominating policy expectations.
- Breakdown of Diversification: Both equities and bonds declined, while gold fell sharply (~-10%) despite risk-off, highlighting a breakdown in traditional hedges. Markets are being driven by inflation and liquidity rather than growth shocks.
- Energy as the Core Transmission Channel: Oil remained the central driver, with prices spiking toward ~$120 intra-week on supply disruptions before stabilizing. The energy shock is feeding into inflation, rates, and cross-asset performance, reinforcing a supply-driven macro regime.
