Madness: Oil Spikes, War Escalates, but Markets Stay Calm

Developments in the Middle East are continuing at an intense pace. As I said yesterday, on Sunday night the U.S. announced a naval blockade in the Strait of Hormuz.

While most people expected markets to bleed yesterday, the exact opposite happened, because Trump said that Iran wants to make a deal. And all of this came as oil moved above $100 a barrel, putting inflation fears back on the table.

THE BLOCKADE OF THE STRAIT

So yesterday, the U.S. began blocking ships from entering or leaving Iranian ports through the Strait of Hormuz. Put very simply, no ship can now approach an Iranian port.

Trump was very clear. He wrote on Truth Social that if Iranian ships approach the blockade, they will be “eliminated immediately.” He literally used the phrase “quick and brutal,” and even said he would use the same system that is used against drug traffickers at sea.

And why did this happen? The story is the following. Vice President JD Vance went to Islamabad for peace negotiations with Iran. After 21 hours of talks, the American delegation returned home without an agreement. Iran refused to commit to not developing nuclear weapons. Trump then responded with the blockade.

Of course, there is one big catch. CENTCOM, the U.S. Central Command, clarified that the blockade applies only to Iranian ports. Ships heading to non Iranian ports through the Strait are still passing normally. Even so, the picture is far from reassuring. NATO allies such as Britain and France refused to participate, which means the U.S. is acting alone in this move.

And Iran? It responded provocatively. The speaker of the Iranian parliament, Mohammad Bagher Ghalibaf, posted on X: “Enjoy current gasoline prices. Soon you will miss $4 to $5 per gallon.” He was basically saying, “You have not seen anything yet.”

HOW THE MARKETS REACTED

This is where things get interesting. Even though most people expected panic, U.S. markets moved higher. The S&P 500 rose 1.02% and the Nasdaq gained 1.23%.

And how does that make sense? We have a blockade of the Strait, a war entering its seventh week, and markets are still rising? The answer came from Trump himself. Just a few hours after the blockade, he said that Iran had reached out to his administration to continue negotiations. So at the same time we had a blockade, we also had a signal that a deal might still be possible. That alone was enough to completely shift sentiment.

And as some analysts pointed out, the pullback in oil, combined with the bearish positioning of many investors, helped fuel the rebound. In other words, many traders were positioned for a decline. When Trump’s statement came out, they were forced to cover. A classic short squeeze.

Now let’s move to the part that has a lot of people thinking: oil. Brent surged as high as $102.72 before pulling back toward $99, while WTI reached $104.55. Yes, oil moved back above $100 a barrel.

And that is a problem, because if this situation continues, inflation will come back into focus again. Remember what happened in 2022? Expensive oil means expensive energy. Expensive energy means higher costs across the board. And that makes the Fed’s job much harder.

What do the numbers say? Markets are pricing in less than a 30% chance of a rate cut by December. In fact, while we were previously talking about rate cuts, now there is even discussion of a possible rate hike. Think about that. Instead of easing, the Fed might have to tighten even more.

And as BNP Paribas’ Gilles Guibout said, every day that passes with oil prices at these levels puts pressure on global growth and feeds inflation.

INVESTING

To be honest, all of this is extremely interesting to watch. Blockades, oil at $100, inflation, a Fed that does not know what to do. Total chaos.

So I am staying with my plan and not deviating from it.