Global stocks dip as Hormuz levy spikes oil, Fed hike bets rise
A sudden surge in oil prices triggered by a US levy on Strait of Hormuz traffic, combined with renewed Federal Reserve rate hike fears, is threatening the recent global equity rally.
Global equities retreated and oil prices spiked after President Donald Trump announced the US would reinstate a blockade of Iranian shipping and collect a 20% fee on cargo passing through the Strait of Hormuz. Brent crude futures surged more than $3.00 to $86.36 a barrel, reaching a one-month high. The immediate market reaction saw MSCI's broadest index of world shares slip into negative territory following a volatile Asian session.
European markets bore the brunt of the early selling, with the pan-European STOXX 600 index falling 0.7%. The travel and leisure sector dropped 2.4% as investors weighed the potential economic fallout of escalating US-Iran tensions. Market participants are now scrutinizing second-quarter earnings from companies like BP and Ericsson to assess the conflict's actual impact on corporate performance.
Geopolitical risks were compounded by hawkish commentary from Federal Reserve Governor Christopher Waller, who warned on Monday that rates might need to rise "in the near term" if inflation remains well above the 2% target. The rate-sensitive US 2-year Treasury yield climbed 2 basis points to 4.29%, its highest level since February. The 10-year yield also added 2 basis points to reach 4.63%.
Traders are currently pricing in a 40% probability of a 25 basis point rate hike at the central bank's July 28-29 meeting. Those expectations will be heavily tested by the release of June US consumer price index data later on Tuesday. Fed Chair Kevin Warsh is also scheduled to deliver the central bank's semi-annual monetary policy report to Congress.
China bucks the risk-off trend
The broader selling pressure was notably absent in China, where the benchmark index closed 2.15% higher. The surge followed June trade data that easily beat economist expectations, with exports and imports hitting their highest levels since the pandemic-skewed figures of 2021. "China's exports and imports surged... as the tech boom supports growth on both fronts," ING analysts wrote in a research note. Other Asian markets were mixed, with South Korean shares rising 0.7% and Taiwanese stocks falling 1.42%.
The divergent regional performance underscores a market at a crossroads. "Markets enter Tuesday at an important inflection point as investors balance three competing forces: renewed geopolitical tensions in the Middle East, the start of the second-quarter earnings season, and June U.S. inflation data," said Bruno Schneller, managing partner at Zurich-based Erlen Capital Management. "These events are likely to determine whether the recent rally broadens further or becomes more selective," he added.
