US Stocks Slide Amid Rising Oil Prices and Bond Yields
What happened
US stocks dropped as military actions in the Strait of Hormuz pushed oil prices higher and increased bond yields. The conflict between the US and Iran is intensifying, affecting global markets.
Market context The military escalation in the Strait of Hormuz has disrupted oil supplies, causing a spike in oil futures. This has led to inflation concerns, pushing bond yields higher as investors adjust their expectations for future interest rates.
Already priced in? The market had anticipated some impact from the conflict, but the scale of the oil and bond yield spikes was larger than expected.
How it spreads
Each step below is caused by the step above it. The first effect is obvious and already reflected in prices. The ones after it usually are not.
Changes revenue, costs or pricing power somewhere in a supply chain, including for companies not mentioned in the story.
- Higher oil prices increase costs for companies. Rising oil prices elevate input costs for energy-dependent industries, squeezing profit margins.
- Increased costs reduce company profits. As input costs rise, companies face pressure on margins, leading to lower earnings expectations.
Changes how likely it is that central banks cut or raise interest rates, and how quickly.
- Central banks may raise interest rates to combat inflation. With inflationary pressures mounting due to higher oil prices, central banks might consider tightening monetary policy to keep inflation in check.
Changes whether assets that normally offset each other still do. When those relationships break, hedges stop working and leveraged funds are forced to cut risk.
- Stocks and bonds move together, reducing diversification benefits. Rising bond yields and falling stock prices indicate a breakdown in the typical negative correlation, increasing portfolio risk.
What it means for each market
Bond yields are rising as investors expect higher inflation.
Mechanism The spike in oil prices has heightened inflation expectations, pushing the US 10-year Treasury yield higher.
US stocks are likely to face pressure from rising costs and interest rates.
Mechanism Higher oil prices and bond yields are expected to weigh on corporate earnings and investor sentiment, leading to a decline in the S&P 500.
Oil prices are likely to remain elevated due to supply disruptions.
Mechanism The conflict in the Strait of Hormuz has constrained supply, leading to a significant increase in crude oil prices.
What the market may be missing
Investors may underestimate the potential for long-term disruption in oil supply chains, leading to sustained higher energy prices.
The market might be too focused on short-term price spikes and not fully accounting for prolonged supply chain disruptions that could keep energy prices elevated.
Long Oil Futures
Buy oil futures to benefit from continued supply disruptions and price increases.
What would prove this wrong
- A ceasefire or de-escalation in the US-Iran conflict
- A significant drop in oil prices due to alternative supply sources
- Central banks indicating no immediate changes to interest rates
- Upcoming OPEC meetings for production guidance
- Statements from central banks on inflation and monetary policy
- Developments in the US-Iran conflict
Jargon buster3 terms
- basis point
- One hundredth of a percentage point. A move from 4.00% to 4.10% is ten basis points.
- yield
- The return on an investment, typically expressed as an annual percentage.
- futures
- Financial contracts obligating the buyer to purchase an asset at a predetermined future date and price.
Ask about this story
Questions are answered from this story's analysis. Ask for a simpler explanation, or push on anything that does not add up.
Why this story was pickedscore 67.2
The US-Iran conflict is affecting multiple asset classes, with potential for long-term market impact.