Author: Igor Kuchma

This Friday marks two months since the U.S., together with Israel, launched its operation against Iran. And while there are signs of de-escalation on paper, in reality, nothing has really improved: the U.S. is still building up its military presence, and Iran is in no hurry to reopen the Strait of Hormuz.

Still, for four straight weeks, the S&P 500 and Nasdaq have closed higher, with both hitting fresh all-time highs last week. Why?

First, they are counting on another “TACO” from the U.S. president. The thing is, unless ships start passing through openly, the negative effects will continue to build, including higher inflation and weaker growth, as the energy crisis persists and shortages of key materials like fertilizers, aluminum, and helium persist.

Second, the U.S. earnings season is helping keep markets afloat. According to FactSet, with 28% of S&P 500 companies reporting, 84% have beaten EPS expectations, and 81% have topped revenue forecasts. Last week’s standout was Intel, surging over 20% on better-than-expected results and strong guidance.

Microsoft, Amazon, Alphabet, and Meta aren’t expected to disappoint this week either, and given their combined market capitalization of over $11 trillion, they are likely to set the tone for the market as a whole. The point is that even solid earnings won’t be enough on their own. Investors will be looking for clear signs that the massive spending on AI and data centers is translating into real profits.

Looking beyond that, even if Big Tech delivers, it will be hard for the market to move higher without positive geopolitical news. If, in turn, strong earnings are also matched with good news on that front, the market could move higher, not just in equities, but also in precious metals and cryptos.

Last week’s talks between Iran and the U.S. didn’t seem to get very far. U.S. Vice President J.D. Vance said the two sides failed to reach an agreement due to major disagreements on several key issues. Donald Trump later added that Washington and Tehran still couldn’t find common ground on Iran’s nuclear program, adding that the U.S. would begin a naval blockade of Iran.

And yet, the S&P 500, Nasdaq, and Dow Jones all opened the week in the green, cryptocurrencies followed suit, and Brent crude actually slipped lower.

It looks like investors are once again pricing in another “TACO”. And to be fair, comments about “significant progress” in negotiations do point in that direction. The only thing is that passage through the Strait of Hormuz remains quite risky, to say the least.

Now, if instead of stabilization we see escalation, it could mean a loss of around 2–4 million barrels per day from the global oil market, worsening the ongoing energy squeeze. In a worst-case scenario, if Iran moves to disrupt the Red Sea and targets regional infrastructure, things could deteriorate even further.

Another risk is deteriorating U.S.–China relations. Trump has threatened 50% tariffs on China if it supports Iran, and China’s Foreign Ministry has responded, saying Beijing would take “decisive measures” in such a case. 

What’s next?

According to Reuters sources, negotiating teams from the U.S. and Iran could meet again in Islamabad later this week. But given how wide the gap still is between their positions, the chances of a breakthrough remain low. For now, though, markets seem content that dialogue is at least continuing.

That said, the longer this rollercoaster drags on, the more negative the implications for the global economy are likely to be, and eventually, for markets as well.

Verbal and written interventions continue. After the U.S. president, in a peculiar way, threatened to bomb bridges and power plants in Iran if the Strait of Hormuz isn’t reopened, media reported on Monday that the sides are close to a 45-day ceasefire and that the trade route could soon reopen.

Still, gains on S&P 500, Nasdaq, and Dow Jones futures were modest, not only because Tehran talks down the optimism — stating it will not accept ultimatums or pressure and that reopening the Strait of Hormuz in exchange for a “temporary ceasefire” is off the table — but also because the facts suggest the same.

In particular, vessel traffic through the strait remains well below prewar levels and is restricted to ships considered friendly to the Iranian regime. For the same reason, oil prices aren’t falling, and Japan is preparing high-level talks with Iran, pointing to the possibility of a more prolonged energy crisis.

If the conflict drags on, Asian countries with limited energy reserves, such as Australia, India, and Indonesia, would be among the most vulnerable. Some are already implementing emergency measures to prioritize fuel use in essential sectors, while price controls and subsidies are being used to mitigate the impact on consumers.

As for Europe, while reserves are relatively comfortable for now, they could eventually be depleted, which would weigh on the region’s economy.

Now, if the situation escalates further, particularly with the start of a ground operation, Iran could respond by targeting energy infrastructure in Saudi Arabia, Kuwait, or the UAE. There is also the risk that the Houthis might attempt to disrupt traffic through the Bab el-Mandeb Strait using drone attacks on vessels.

This would put more pressure on energy prices and push up inflation, forcing central banks to tighten policy and hurting the wider economy.

What was supposed to be a quick sprint is turning into a marathon. Despite ongoing talks, we’re already in week five of the U.S. “special operation” against Iran, and activity in the Strait of Hormuz remains well below normal levels.

Thanks to TACO, markets haven’t panicked yet, but it’s fair to say they’re far from calm. Since the start of the year, the S&P 500 index has dropped nearly 8%, XAUUSD and XAGUSD remain under pressure, while yields on 30-year Treasury bonds have climbed to around 5%, driven by inflation fears linked to the conflict in the Middle East.

And the worst may still be ahead. 

If the U.S. launches ground operations against Iran, the conflict could escalate further, with the Houthis potentially stepping in to disrupt key routes in the Red Sea. That would put vital energy supplies beyond the Strait of Hormuz at risk and add more pressure to already fragile global supply chains.

In the meantime, the macro backdrop is starting to crack. March data showed a synchronized slowdown in business activity across the U.S., Europe, Australia, Japan, and India, according to S&P Global.

At the same time, cost inflation is picking up, raising the risk of stagflation. This means that while central banks will likely respond by tightening policy, they’ll do so carefully, aware of the growing downside risks.

Even if an agreement between Iran and the U.S. is eventually reached, the impact on growth and inflation is already being felt, and central banks will have to factor that in.

So, while markets might rally on news of a resolution, the negative effects won’t disappear overnight. Jumping fully into a “risk-on” mode immediately may not be the best move. That said, gold — which has struggled in recent weeks due to rate hike fears — could be one of the assets to benefit.

Summing up last week’s central bank meetings in one sentence, rising energy prices driven by tensions in the Middle East could push inflation higher, but it’s still too early to assess the scale or duration of the impact on the economy — so for now, it’s a wait-and-see approach, with a tightening bias if things escalate.

Starting with the Fed, the regulator held rates steady at 3.5–3.75% as expected, it flagged the Middle East situation as “uncertain,” raised its 2026 inflation forecast from 2.4% to 2.7%, and nudged the long-run neutral rate up to 3.1%. No wonder the S&P 500, Nasdaq, and Dow Jones all ended Wednesday in the red.

The fact that Powell said he does not plan to step down as Fed Chair while the investigation is ongoing and will remain in his role until a successor is appointed also didn’t help the case. For reference, his term on the Board runs through 2028, so Trump won’t be able to push the central bank’s agenda in his favor for much longer.

In Europe, the ECB, although leaving interest rates unchanged for the sixth straight meeting, has several officials openly discussing a potential hike in April. In a stress scenario, inflation could reach 6.3% within a year. Meanwhile, markets have fully priced in three quarter-point hikes this year.

In the UK, expectations are even more aggressive, with four hikes now priced into swaps. Japan, in turn, remains on its gradual tightening path, signaling that as long as real rates stay deeply negative, rate hikes will continue. That said, this was already the baseline even beforу Iran war, thus nothing materially new here.

Australia was the only one to take action, delivering another 25bp hike to 4.1%. 

In short, most central banks are tightening cautiously. Now, if Iran were to block the Strait of Hormuz, hawkish rhetoric suggests regulators could take direct action, which could further hurt markets.

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.