Market snapshot
Futures tied to major U.S. stock indices were trading lower as the week drew to a close, with energy markets under strain from persistent hostilities in the Middle East. Brent crude remained perched above the $100 a barrel threshold, reflecting concern that the conflict - involving sustained U.S.-Israeli operations in Iran - could keep supply strained for an extended period.
By 04:10 ET (08:10 GMT), contracts on the main U.S. equity benchmarks were indicating a weaker session ahead. The Dow futures contract had fallen by 241 points, or 0.5%, S&P 500 futures were down 35 points, or 0.5%, and Nasdaq 100 futures had slipped 157 points, or 0.6%. Those moves followed a previous trading day in which the headline indexes recorded declines amid scant signs that the fighting will ease soon.
Geopolitical driver: Strait of Hormuz and shipping concerns
Investors have been particularly sensitive to a declaration from Iran’s new Supreme Leader, Mojtaba Khamenei, indicating that the Strait of Hormuz - a strategic maritime chokepoint - would remain closed. The strait channels a substantial portion of global oil flows, and the suggestion that transit could be impeded triggered a renewed jump in crude prices and weighed on risk appetite across markets.
Analysts and market participants have noted the potential for Tehran to use shipping disruptions as a form of resistance even as the United States and Israel appear to have obtained military advantages in their joint campaign. The Strait of Hormuz is a critical artery for energy shipments, carrying roughly a fifth of the world's oil supply, and any squeeze on flows through that corridor reverberates across commodity and financial markets.
In response to the threat to shipping, the U.S. Treasury Department said it would allow some countries to buy sanctioned Russian crude until April 11. Treasury Secretary Scott Bessent also indicated that the U.S. is planning for Navy escorts for commercial vessels passing through the strait, a measure intended to help sustain merchant shipping amid the tensions.
Brent crude above $100 - volatility and probabilities
Brent crude moved higher this week as market participants priced in the risk of a prolonged regional confrontation. At 04:33 ET on Friday, Brent futures were quoted up 0.6% at $101.04 a barrel, leaving the benchmark on track for a weekly gain of more than 9% over the last seven days. Prior to the outbreak of hostilities, Brent had been trading around $70 a barrel.
Price swings have been large. At one point during the recent volatility, Brent had surged to nearly $120 a barrel, only to later pull back briefly below $90 a barrel. That degree of volatility has elevated debate among investors and analysts over whether the recent run-up will persist.
Capital Economics highlighted the uncertainty embedded in futures and options markets, noting that option-implied prices suggest a roughly one-in-five chance that Brent will be $100 per barrel or higher in three months’ time. Kieran Tompkins, Senior Climate and Commodities Economist at Capital Economics, flagged that probability in a note to clients, underscoring the degree of market concern despite the short-term oscillations.
Precautionary policy responses and potential supply offsets
Beyond the temporary allowance for sanctioned Russian crude purchases and the planned naval escorts, authorities and market watchers have been considering a range of measures and outcomes that could influence supply and demand balances. The temporary imports permission until April 11 is a specific, time-limited step intended to help offset disruptions tied to the region, while physical protection for commerce through the strait addresses immediate logistical risks to tankers and merchant ships.
How long those measures remain in force and whether they will be sufficient to fully allay supply concerns depends on how events in the region evolve. The current security and logistical responses are explicit actions noted by authorities and market observers in recent days.
Gold, the dollar and inflation expectations
Spot gold has been on course for a second consecutive weekly decline despite the geopolitical shock. The metal's weaker performance has been linked in part to a firmer U.S. dollar, as investors weigh the potential for higher inflation driven by energy cost increases alongside the prospect that central banks may change the path of monetary policy.
Higher oil and gas prices can feed into a broad set of economic prices because energy inputs go into many products, including fertilizer and plastics. A sudden rise in energy costs could therefore create increased inflationary pressure in economies worldwide, a point that has been highlighted by market participants as they reassess rate-cut expectations.
Those shifting expectations may prompt central banks, including the Federal Reserve, to delay or reconsider planned interest-rate reductions. If policymakers signal or implement tighter monetary settings than previously expected, the U.S. dollar could strengthen further. A stronger dollar typically reduces the appeal of dollar-priced gold for overseas buyers, helping explain why bullion has not performed as a safe-haven bid in this episode.
PCE data in focus
Traders were also preparing for a fresh reading on U.S. inflation: the personal consumption expenditures price index for January. The core PCE measure - which strips out food and fuel and is a favored inflation gauge among policymakers - is expected to show a 3.1% year-on-year gain for the twelve months to January, a touch above the 3.0% pace recorded in December.
Markets keep a close eye on PCE because it is one of the preferred metrics used by the Fed in assessing inflation trends when setting monetary policy. Notably, the Commerce Department's PCE figures have recently been somewhat hotter than the Labor Department's consumer price index, driven by differing weighting approaches for components such as housing and healthcare, as well as variations in scope and how consumer substitution is treated.
Those methodological differences mean the PCE can show different dynamics versus the CPI. For instance, a lower relative weight for shelter costs in the PCE and a higher exposure to rising medical costs have helped keep the PCE elevated relative to the CPI readings in recent months. For context, the most recent CPI reading for February showed a 2.4% year-on-year increase.
However, it is important to note that those inflation figures largely cover a period before the new phase of fighting began - the Iran war commenced with a barrage of U.S. and Israeli air strikes on Iran in late February - and so the outlook for inflation has become less certain since the outbreak of the conflict.
Corporate note - Adobe leadership change
In corporate news that affected investor sentiment for an individual equity, Adobe said its long-serving chief executive, Shantanu Narayen, will step down. The announcement came after Narayen’s 18-year tenure at the firm's top post prompted a board-led search for a successor. Narayen joined Adobe in 1998 and rose through the ranks before assuming the CEO role in December 2007.
One of Narayen's notable strategic moves was consolidating the company's suite of software products into a cloud-based subscription framework. Over his time as chief executive, Adobe's annual revenue rose to $23.77 billion from $3.58 billion. The company, headquartered in San Jose, California, is known for products including the image editor Photoshop and the video editor Premiere Pro.
Adobe also reported a quarter in which it beat both top- and bottom-line expectations and issued current-quarter guidance that was generally above market forecasts. Still, news of the CEO transition was met with selling in after-hours trading.
What to watch next
- How oil prices evolve in coming sessions, especially whether Brent holds above the $100 mark and how options-implied probabilities shift.
- The PCE inflation readings and subsequent market reaction to the report, given its importance to Fed policy considerations.
- Any further statements or actions related to shipping through the Strait of Hormuz, including the duration of temporary allowances for sanctioned crude imports and plans for naval escorts.
These developments will continue to influence risk assets, commodity markets and expectations for monetary policy in the near term.