Author: Igor Kuchma

Jerome Powell and Co were right to be cautious about cutting rates. Inflation rose to 3.1% in January from 3% in December, above the 2.9% consensus. Headline PCE fell slightly to 2.8%, just below forecasts, but there’s a real risk things could worsen quickly and affect sentiment around the S&P 500, Nasdaq, and the Dow Jones.

First, major U.S. companies such as Walmart continue to pass on to consumers the costs resulting from last year’s increase in import tariffs. An end to the trade wars could resolve this situation, but the current administration shows no signs of backing down, even after the Supreme Court has ruled on the matter.

Second, tensions in the Middle East, which, according to analysts cited by Reuters, have led to estimated oil production cuts of 7 to 10 million barrels per day, roughly 7% to 10% of global demand, while Qatar has also fully suspended its liquefied natural gas production, pushing up a critical input cost for many goods.

In addition, Qatar and Saudi Arabia are major exporters of urea, ammonia, and diammonium phosphate, key nitrogen and phosphorus fertilizers. Any shortage could drive food prices higher. Qatar also produces more than 30% of the world’s helium, which is widely used in the manufacture of computer chips.

Thus, we are in a highly inflationary environment, meaning the Federal Reserve may adopt a more hawkish stance.  The market is already pricing in rate cuts no earlier than the end of this year. For the US Dollar Index, that could be good news, but it is less positive for the bond market and, above all, for the stock market.

And it’s not just the Fed feeling the heat. If the Middle East crisis drags on, other central banks may face a tough choice over whether to return to tighter monetary policy, as the Reserve Bank of Australia did back in February.

In early February, the Reserve Bank of Australia became the first major central bank to reverse course, raising rates by 25 basis points to 3.85% as inflation picked up sharply in the second half of the year, climbing from 2.1% year-on-year to 3.8%, above the RBA’s 2–3% target range.

Now that oil prices have surpassed $100 per barrel, other central banks could follow with similar moves.

Starting with the US, oil has already risen from $55 to $80 per barrel, an increase of $25, implying approximately 50 basis points of additional inflationary pressure. According to analysis by The Kobeissi Letter, that alone could push the CPI from around 2.4% to approximately 2.9%.

With oil at around $95 per barrel, inflation could approach 3.2%, while levels close to $110 would imply something closer to 3.5%. In a more extreme scenario, oil at $130 could push inflation to 3.9%, and prices near $150 could raise it to around 4.3%, assuming the same relationship holds.

Even if the Fed doesn’t raise rates again, it will likely delay cutting them — and recent moves in the S&P 500, Nasdaq, and Russell 2000 suggest markets are already starting to anticipate that.

As for Europe, unlike the U.S., the region has fewer energy reserves and isn’t a major energy exporter, so the impact could be stronger. Add to that the fact that inflation in the eurozone had already started accelerating — February data showed headline inflation at 0.4% month-over-month (seasonally adjusted) and 1.9% year-over-year, while core came in at 0.4% m/m and 2.4% y/y — and it’s clear why European equity markets have been noticeably weaker.

In China’s case, the country has built massive strategic oil reserves. Even if imports were completely cut off, it could likely rely on its reserves for several months. It also has alternative supply routes and partners, including Russia. For natural gas, China could sustain itself for just over a month using reserves alone, again with alternative suppliers.

The problem is that if a military conflict drags on, persistently high oil and gas prices could slow the global economy, which in turn would reduce demand for Chinese exports, still one of the main drivers of the country’s GDP growth.

Talks in Oman have failed, and on Saturday, the United States and Israel launched attacks on Iran with the aim of dismantling its missile capabilities and halting any nuclear development. In response, Iran’s Revolutionary Guard fired missiles at U.S. bases in Arab countries allied with Washington, including the United Arab Emirates, Bahrain, Qatar, Jordan, and Kuwait. 

What makes the situation even worse for the global economy is that the attacks reached the Strait of Hormuz. As a result, by Monday morning, about 40 supertankers were stuck near the strait, each carrying roughly 2 million barrels of oil. Not surprisingly, oil prices are climbing, even after OPEC+ decided over the weekend to boost production by 206,000 barrels a day, because the bigger question of how to actually move that oil out of the Persian Gulf is still hanging in the air.

What would happen if the conflict were to drag on for weeks?

In short, the effects would be unpleasant, especially for oil-importing countries the hardest, including China and the eurozone. As for industries specifically, similarly, those that rely heavily on oil would feel the impact first. For instance, on Monday morning, U.S. airline stocks were already down in pre-market trading, while major European travel companies, including airlines, hotel chains, and cruise operators, also suffered sharp declines.

In perspective, most industries outside of energy are likely to suffer, either directly or indirectly, as the energy crisis after the war in Ukraine showed. For example, the auto industry could struggle with rising costs for plastics and synthetic materials, retailers might face higher transportation expenses, and the tech sector could be hit by higher inflation, which could push the U.S. Federal Reserve toward tighter policies. 

Speaking of that, the recent data isn’t looking encouraging. As companies start passing higher costs onto consumers, U.S. producer prices for January rose 0.5 percent month over month and 2.9 percent year over year, while core producer prices went up 0.8 percent month over month and 3.6 percent year over year.

On the flip side, safe-haven assets like gold (XAUUSD) and the U.S. dollar could benefit.

Friday’s Supreme Court ruling that the tariffs imposed under Trump’s IEEPA authority were illegal gave the S&P 500 and Nasdaq a boost. Bitcoin price also climbed on hopes that removing a key inflationary factor would prompt the Fed to cut rates sooner.

The problem is that while the Supreme Court’s decision complicates the imposition of tariffs, there are alternative tools beyond the IEEPA. For example, Section 122 of the Trade Act of 1974 allows tariffs of up to 15% for 150 days in the event of an economic crisis, although only Congress can extend them, and Trump already used it on Saturday.

There is also Section 201, which protects U.S. industries from foreign competition; Section 301, which allows the U.S. Trade Representative to impose unlimited tariffs on countries with unfair practices, reviewed every four years; Section 338 of the Tariff Act of 1930, which allows tariffs of up to 50% or even total import bans against countries that discriminate against the US; and Section 232 of the Trade Expansion Act of 1962, Trump’s favorite, which allows unlimited tariffs if there is a “threat to national security.”

In the meantime, as companies passed more tariff costs to consumers, December PCE showed monthly inflation accelerating to 0.4% and year-on-year inflation at 2.9%, with core inflation rising to 3%. If this trend continues, the Fed could even consider raising interest rates, as suggested by the latest meeting minutes.

It also appears that, to prevent Trump from diverting Fed policy from employment and inflation data, rumors are spreading that Jerome Powell is working to strengthen the Fed’s independence, using strategies to win favor with Congress and encouraging dissent within committees, which could make it difficult for his successor to control the agenda.

If Powell succeeds, and tariffs remain while companies keep passing costs to consumers, the market could finish the year disappointed with the Fed’s stance, weighing on overall sentiment.

Geopolitical tensions seem to have cooled somewhat in recent weeks: the U.S. president is no longer talking about possible operations against Mexico or Colombia, and with Iran, diplomacy seems to have taken precedence. No wonder optimism in gold has faded somewhat, and oil prices have pulled back.

That said, this could simply be the calm before the storm.

When it comes to Tehran, although a new round of nuclear talks with the U.S. is expected this week, it is hard to see Iran agreeing to demands such as exporting all of its uranium stockpiles or dismantling its enrichment infrastructure, and renewed domestic protests could also serve as a pretext for action.

If the U.S. ultimately launches an attack on Iran, the fact that it takes place over the weekend while markets are closed will likely not prevent a risk-off reaction. It would need to be swift, like the one in Venezuela, but that seems unlikely given reports that the U.S. military is preparing for sustained, weeks-long operations.

In such a scenario, oil prices could spike sharply as traders price in the threat to supplies — especially if the Strait of Hormuz were closed, given the region’s outsized role in global energy flows. This kind of risk premium has supported oil moves recently.

If the worst were to happen and Iran retaliated by closing the Strait of Hormuz, panic selling could affect a market already under pressure from AI-related concerns. In that scenario, virtually all assets, including silver and gold, could come under pressure — though silver recent price action shows how volatile it has become. Incidentally, cryptocurrencies could be the hardest hit…

As for the conflict in Ukraine, another round of negotiations is scheduled for February 17 and 18. The fact that talks are continuing is encouraging, but key territorial issues remain unresolved. That makes the prospect of lasting peace in the short term seem quite distant, which is perhaps only good news for defense contractors.

Thus, even with U.S. markets closed today for Presidents’ Day and China celebrating the Lunar New Year, it is unlikely to be a quiet week. Even if geopolitics remain calm, the minutes from the latest Fed meeting, December PCE data, GDP figures, and weekly jobless claims could further sour sentiment.

Last week wasn’t great for Big Tech. The FAANG index — Meta (formerly Facebook), Apple, Amazon, Netflix, and Alphabet (Google) — fell 3.7%, while the MAMAA index (Meta, Apple, Microsoft, Amazon, Alphabet) dropped an even steeper 4.6%. By comparison, the S&P 500 index fell only 0.10%.

And this isn’t because companies disappointed on earnings. In fact, combining results from the six “Magnificent Seven” companies that have already reported with estimates for Nvidia, Q4 earnings for the group are expected to rise 24.2% year over year, supported by 18.9% revenue growth.

So what’s the problem?

Investors are growing increasingly concerned about the scale of Big Tech’s spending, which now far exceeds any tangible return from AI, and studies like the one from Boston Consulting Group and MIT show that only about 5–6% of companies are generating meaningful, measurable value from AI, which clearly doesn’t help.

Thus, the market is beginning to value future promises over current results. In other words, investors are tired of waiting. For years, they were willing to overlook sky-high valuations in the hope of a future payoff. Now, they’re starting to demand actual results — results that, so far, largely aren’t there.

And yet the spending isn’t slowing down. In 2026 alone, Microsoft, Alphabet, Amazon, and Zuckerberg’s “forbidden fruit” are expected to invest around $650 billion into AI. 

At the same time, speculation around a potential OpenAI IPO adds another layer to the story. A listing could reignite AI enthusiasm and provide a long-awaited liquidity event — but it would also force the market to put a real price on AI’s economics, potentially exposing how much of the thesis still rests on expectations rather than profits.

The parallels with the late-1990s dot-com bubble are becoming harder to ignore. Back then, massive CAPEX, lofty expectations, and soaring valuations moved in lockstep — until they didn’t. While today’s tech giants are largely self-funding, a prolonged failure to deliver tangible AI returns could still trigger deeper drawdowns.

That said, there is an important political nuance. By the summer of 2026, the U.S. election campaign will be in full swing, and Republicans, currently seen as the “party in power,” will likely want a positive market boost. This means we could still see a new TACO from President Trump if the Fed does not turn more dovish by then.

Although the surge in USD/JPY forced the Bank of Japan to raise its 2026 core inflation forecast from 2.0% to 2.2% — technically signaling the need for more aggressive rate hikes — the BoJ kept its policy rate unchanged at 0.75% last Friday.

This lack of resolve reflects how limited the BoJ’s room to maneuver really is. Raising rates faster than 25 basis points every six months would pose serious risks to Japan’s financial system. Just to put this into context, in 2025, debt servicing accounted for approximately 24.5% of the government’s budget.

For the same reason, the Bank of Japan merely reiterated that real interest rates remain deeply negative and that, if its growth and inflation forecasts prove accurate, it will continue to raise official interest rates only gradually, without offering any specific guidance.

Why did the yen strengthen then?

Apparently, the BoJ may have intervened in the currency market for the first time since July 2024, potentially in coordination with the US, if reports are true that the New York Federal Reserve conducted rate checks on USD/JPY around midday on Friday, asking traders at what levels the pair would trade if it entered the market.

The problem is that any Japanese intervention would almost certainly be only a temporary solution. The underlying structural problems remain unresolved: a huge public debt burden and a prime minister firmly committed to fiscal expansion.

If Japan fails to stabilize the situation, it could be forced to sell some of its US Treasury holdings, which would put upward pressure on US yields. At the same time, unwinding the yen carry trade — borrowing yen to invest in risky assets — could trigger a sharp rise in volatility, much as markets experienced in 2024 after the Bank of Japan’s surprise rate hike.

Finally, yet importantly, if the US ultimately decides to actively support the yen, the added pressure on the US dollar index could give gold another boost.

For a long time, Kevin Hassett, one of Trump’s most loyal allies and a staunch advocate of faster interest rate cuts, was considered by many to be the leading candidate to replace Jerome Powell as Fed chair. However, the markets were not very enthusiastic about this idea. Hassett’s appointment would have been seen as a direct blow to the Fed’s institutional independence, which is why the DXY came under pressure.

Last week, though, Hassett’s chances dropped sharply, and a new alternative emerged on the horizon: Kevin Warsh. This came after Donald Trump commented that he values Hassett’s role in the White House and does not want to lose him. Apparently, the president was advised that it would be more difficult for Congress to approve Hassett’s appointment and that the markets would likely react more favorably to Warsh’s nomination.

Would Warsh submit to Trump’s wishes?

Given the US president’s December statement that “anyone who disagrees” with him would never head the Federal Reserve, the answer would appear to be yes. However, although Warsh also favors rate cuts, institutional credibility is not a secondary concern for him. That means Warsh is much less likely to implement policies by presidential order. His decisions would be based on macroeconomic data, not political pressure.

And for now the macro backdrop argues for patience:

Inflation remains contained, albeit persistent, with December CPI meeting expectations at 0.3% month-on-month and 2.7% year-on-year, while core inflation came in below forecasts at 0.2% month-on-month and 2.6% year-on-year.

 On the other hand, the labor market continues to show resilience. Initial jobless claims fell unexpectedly, dropping by 9,000 to 198,000 in the week ending January 10, below the Reuters consensus of 215,000.

This helps explain the strengthening of the US dollar index last week, even despite President Trump’s statements on Greenland and the deterioration of relations with the EU.

Under the banner of fighting drug cartels — and alongside invoking the Monroe Doctrine, which asserts a U.S. right to an exclusive sphere of influence across the Western Hemisphere — the U.S. carried out a special operation in Venezuela. Soon after, U.S. authorities began seizing tankers suspected of transporting Venezuelan oil, even when they were sailing under foreign flags.

Naturally, this sparked concerns that oil prices could slide. After all, Venezuela holds the largest proven oil reserves in the world, and a sudden return of its crude to global markets could sharply boost supply. In reality, however, that didn’t happen. While crude oil prices did start the year lower, they quickly recovered, and by Monday, Brent crude was trading above $62 per barrel.

What explains this resilience?

First, despite its vast reserves, Venezuela simply cannot flood the market overnight. Years of sanctions have left the country’s oil industry in serious decline. Restoring production will require hundreds of millions of dollars in investment, as well as time.

Furthermore, most of Venezuela’s oil reserves are located in the Orinoco Belt and are classified as heavy or extra-heavy crude. Extracting them is costly and technically difficult. According to some estimates, the break-even price of Venezuelan oil would have to be at least $80 per barrel for production to be economically viable. No wonder, during a recent meeting between Donald Trump and representatives of the oil and gas industry, the CEO of ExxonMobil said the Venezuelan market is “uninvestable” in its current state.

At the same time, tensions are rising in the Middle East, especially in Iran.

The country is facing new protests as the rial continues to fall and inflation remains high. The demonstrations are becoming political, with Tehran blaming the U.S. and Israel for stirring unrest. If the situation worsens and the U.S. intervenes, Iranian oil supplies could be disrupted, potentially tightening the global market.

The good news for those hoping for lower oil prices is that Goldman Sachs still expects average Brent and WTI prices in 2026 to be $56 and $52 per barrel, respectively, as oil reserves continue to rise in OECD countries.

The 19th-century idea of “America for Americans” is back in the spotlight. Washington seems to be reaffirming its claim to control political and economic processes in the Western Hemisphere, drawing a clear red line against foreign powers such as China and Russia.

The first move under this renewed approach wasn’t a behind-the-scenes regime change through a so-called “color revolution,” but a military operation in Venezuela, involving the abduction of the president and his wife. And judging by Trump’s comments, interventions in Cuba, Colombia, or even Mexico could follow.

The ethics of this move remain a matter for Congress to debate, but several countries have already openly condemned it. Whether those objections matter is another question. What matters is that, historically, U.S. interventions in the region have rarely improved living standards.

What about the markets?

On the one hand, rising geopolitical tensions could boost demand for safe-haven assets, especially non-dollar assets such as gold (XAUUSD). Silver (XAGUSD), platinum (XPTUSD), and other precious metals could follow. In fact, they already opened higher on Monday.

As for the oil market, a sharp drop in prices is far from guaranteed. 

Although Trump has never hidden his interest in Venezuela’s vast mineral and oil reserves — or his belief that U.S. oil companies were unfairly pushed out after the industry was nationalized — Venezuela’s oil infrastructure is largely in disrepair, and the regulatory environment remains uncertain. As a result, despite holding the world’s largest proven reserves, it is unlikely that Venezuelan oil will return to global markets in significant volumes in the short to medium term, limiting its ability to meaningfully influence global supply or ease upward pressure on oil prices.

When it comes to the stock market, assuming the U.S. has achieved its objectives and no further operations in Venezuela are planned, this could actually be a mildly positive factor for the S&P 500. Historically, however, the index’s reaction to U.S. interventions in Latin America has been relatively limited.

That said, it all depends on how the situation evolves. What would happen if China decided to intervene? Or if Latin American countries attempted a coordinated response?