Author: Igor Kuchma

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?

Here we are on the last Monday of the year. While the S&P 500, NASDAQ, Dow Jones, and even gold (XAUUSD) have all posted solid gains since the start of 2025, calling the year “calm” would be a stretch — especially on the geopolitical front. There are some signs of easing tensions, but it’s far too early to declare a new era of peace.

For instance, according to CNN, the Israeli prime minister will meet with Trump to request approval for another operation in Gaza. Meanwhile, there are signs of progress in the conflict between Russia and Ukraine, which has led to a brief decline in precious metals, but the most difficult part is yet to come.

Markets, however, don’t seem too worried about the uncertain prospects for geopolitical de-escalation. Risk assets continue to trend upwards, and according to investment bank forecasts, optimism appears poised to persist into next year. The average year-end 2026 target for the S&P 500 among major strategists stands at 7,555. 

One of the key drivers is expected to be a still-strong economy, which supports corporate profits.

In this regard, in the third quarter, US GDP grew by 1.1% quarter-on-quarter, 2.3% year-on-year, with consumer spending contributing 2.4 percentage points to growth, led by services. The challenge is that, with such strength, the Fed has less incentive to cut rates, so Treasury yields are not falling rapidly.

Looking at this week, the holiday schedule — including the New Year’s closure — means things are likely to be quiet. The main focus will be on November’s housing market data, the release of the minutes from the latest Fed meeting, and weekly jobless claims – with the latter two crucial for understanding future rate moves.

Looking ahead to this week, given the holiday calendar, things are likely to be quiet. Attention will mainly focus on November’s real estate market data, the release of the minutes from the Fed’s latest meeting, and weekly unemployment claims, with the latter two being key to understanding future interest rate movements.

If the situation continues to evolve according to a more positive scenario, i.e., if the labor market deteriorates but not at a rapid pace, it is unlikely that the regulator will rush to lower interest rates. For gold, in particular, this may not be the best news, and the opposite could happen with the dollar index.

Alongside U.S. macroeconomic data, which did come as a surprise, particularly on the inflation front, as CPI undershot expectations and fell back to levels last seen in March 2021 (consensus had forecast core CPI at 3.0%, while the actual reading came in at 2.6%), last week was packed with central bank meetings. 

The most closely watched one was that of the Bank of Japan. The concern was that further monetary tightening could disrupt the yen carry trade, potentially triggering margin calls and forced selling — similar to the turmoil seen last July, when the BOJ unexpectedly raised rates by 15 basis points to 0.25%, renewing volatility in USD JPY.

In practice, however, those fears haven’t materialized — at least not yet.

After the Japanese central bank raised its official interest rate from 0.5% to 0.75% and signaled that further increases remain possible as long as economic conditions remain stable, the yield on 10-year Japanese government bonds rose above 2%, the yen weakened to around 157 per dollar, and the Nikkei 225 rebounded.

In the United States, markets remained relatively calm. 

The S&P 500 ended the week largely unchanged (+0.1%), while the Nasdaq rose 0.5%, despite ongoing concerns over high valuations in the tech sector. The muted reaction suggests that markets had already priced in the possibility of a rate hike, so much of the adjustment had already taken place.

Now, even if some downward pressure emerges in the short term, its overall impact is likely to be limited. This is because, with each additional rate hike by the Bank of Japan, the adverse effect on markets tends to fade as the yen carry trade loses its appeal, which, in theory, should reduce the risk of large-scale forced selling.

Elsewhere, the Bank of England cut its policy rate by 25 basis points to 3.75%, keeping the door open for further easing. At the same time, the European Central Bank held its deposit rate at 2% and signaled that no additional rate cuts are expected in 2026, which helped drive a rise in the EUR USD pair.