Global investors received a sharp reminder of how quickly the oil market can revive fears about inflation and market volatility.
The move came after U.S. President Donald Trump said on Wednesday that an interim agreement with Iran to end the war “is over.”
Oil Price Spike Hits Inflation-Sensitive Assets
Inflation-sensitive assets reacted quickly to the news. Bonds and gold both fell as oil prices jumped by around 5%.
Aneeka Gupta, director of macroeconomic research at WisdomTree, described the move as a major wake-up call for financial markets.
Investors had expected oil supplies to return more smoothly to the market. That had helped lower inflation expectations in recent weeks.
All Eyes Turn Back to Oil
Oil prices were the first major market to react to the latest Gulf developments.
Prices rose as much as 6% on Wednesday, reaching a two-week high after Trump’s comments.
However, Brent crude near $78 per barrel remains well below the $100-plus levels seen for two months from mid-March. Those higher prices had previously raised serious concerns among policymakers about inflation.
Oil prices had dropped quickly after the U.S. and Iran signed an initial memorandum of understanding in June. That agreement helped reopen the Strait of Hormuz.
As stranded tankers inside the Gulf returned to the market, oil supply increased and created a temporary mini-glut.
The key question now is where oil prices will settle once that extra supply fades. Investors are also watching whether tanker operators may become less willing to re-enter the Gulf.
Stock Markets Face a Difficult Moment
The news arrived at a challenging time for equity markets.
Some investors are already questioning the strength of the artificial intelligence trade. Traders are asking whether companies linked to AI chips and models can continue to generate strong revenue if supply pressures ease or demand falls short.
Since the Nasdaq reached a record high on June 1, memory chip makers have faced a volatile pullback.
An ETF tracking memory chip stocks has fallen nearly 8%, while the Philadelphia Semiconductor Index is down around 5%.
Broader Markets Hold Up Better
Outside the AI-heavy parts of the market, performance has been stronger.
The equal-weight S&P 500, which reduces the influence of the largest companies, has risen nearly 3%.
Europe’s STOXX 600, which has less exposure to the AI theme, is up around 4%.
This shows that the pressure has been more concentrated in high-growth technology and semiconductor stocks.
Bond Yields Rise as Inflation Fears Return
Bond yields moved higher after Trump’s remarks, following the sharp rise in oil prices.
Traders increased their expectations for future price pressures. They also adjusted their positions for the possibility of higher interest rates.
Contracts tracking eurozone inflation expectations for one year ahead rose by 14 basis points to 1.992%.
Markets also priced in around 35 basis points of further tightening from the European Central Bank this year. That was up from 25 basis points on Tuesday.
Traders also expected around 36 basis points of tightening from the Federal Reserve and 32 basis points from the Bank of England.
Short-Term Bonds See the Biggest Moves
Shorter-dated bonds saw the strongest reaction because they are more sensitive to interest rate expectations.
Germany’s and Britain’s two-year bond yields both jumped by 10 basis points. They reached their highest levels in almost a month.
The move in the United States was more limited. U.S. two-year yields rose by 5 basis points, partly because the country is a major energy exporter.
Even so, markets still expect U.S. consumer inflation to be around 2.15% in one year. That is far below the 4.2% inflation rate recorded in May.
Market Volatility Wakes Up Again
Volatility had been relatively calm for much of the past few months.
That changed on Wednesday, as several volatility indicators moved higher.
The VIX volatility index had already returned to prewar levels by early June, except for a brief spike linked to concerns over expensive technology stocks.
Bond and currency volatility followed a similar pattern. After weeks of steady decline, both moved higher after the latest oil shock.
The main exceptions are equity markets with heavy exposure to chip stocks, such as South Korea and Taiwan. Volatility in those markets remains extremely elevated.
Gold Falls Despite Inflation Concerns
Gold also came under pressure.
The precious metal is now 23% below the level it reached before the war began. Before that, gold had enjoyed a powerful six-month rally, rising around 70%.
That rally had been supported by central banks, institutional investors, and retail traders.
After a small rebound at the start of July, gold has almost returned to where it began the month. It traded down 1.1% on the day at around $4,060 an ounce.
Why Gold Did Not Act Like a Safe Haven
Gold is often seen as a safe-haven asset and a hedge against inflation.
At the start of the Iran war, gold initially moved higher. However, it quickly reversed direction.
Instead of safe-haven demand driving prices higher, investors focused on a stronger U.S. dollar and rising expectations for central bank rate hikes.
Those two forces put pressure on gold and pushed prices lower.
