The end of the ceasefire will likely result in higher inflation and further rate hikes by the Federal Reserve.
President Trump criticizes NATO allies on Iran and Greenland
President Donald Trump criticized NATO allies in Ankara, Turkey, for their lack of support for the United States’ war with Iran and annexation of Greenland.
A ceasefire between the United States and Iran broke down this week after the United States launched more than 80 strikes against Iran in midweek in response to Iranian attacks on ships sailing through the Strait of Hormuz. At a NATO summit in Turkey, President Donald Trump declared the ceasefire “over” and promised more strikes against Iran.
The airstrikes and the prospect of further military action had an immediate impact on stock and commodity prices. S&P500 (SNPINDEX: ^GSPC) Brent crude, the international benchmark, rose about 4% to $77 a barrel from about $72, after falling about 0.4% on Wednesday. Crude oil prices have been on a downward trend since exceeding $112 per barrel in mid-May.
Additionally, the yield on the 10-year U.S. Treasury note has also risen, reaching 4.57% on Wednesday, up from 4.38% about a week ago. Yields tend to react to the prospect of higher inflation and the possibility of interest rate hikes by the Federal Reserve.
No ceasefire means future inflation and higher interest rates.
But what does the end of the ceasefire mean for the stock market going forward, if it really is over as President Trump says? Market analysts predict that the biggest impact of new hostilities in the Persian Gulf will likely be on inflation and interest rates.
On Wednesday, market and economic analyst Edward Yardeni told Bloomberg that inflation concerns are resurfacing, making it suddenly more likely that the Fed will raise interest rates.
This is also true in the futures market. Futures traders are currently pricing in a nearly 70% chance that the U.S. Federal Reserve will raise benchmark interest rates at its Monetary Policy Committee meeting on September 15-16. Just a month ago, they priced in a 40% chance of a rate hike at that meeting. Futures prices indicate an almost 50% chance of a two-quarter point rate hike by the end of this year.
It is clear that interest rates will tend to rise once the ceasefire ends. And rising oil prices will likely push up inflation, which is already well above the Fed’s 2% target.
Rising interest rates, oil prices, and bond yields can all pose significant headwinds for stock markets.
Additionally, stock market volatility is spiking again. On Wednesday, the CBOE Volatility Index (VIX) exceeded 18, a level that indicates growing investor anxiety. CNN’s Fear and Greed Index has also jumped from 30 to 43 over the past week, still falling short of “extreme fear” but firmly in the “fear” range.
The increased volatility could continue into November, as some analysts believe Iran’s strategy is to avoid a substantive deal with the United States until after that month’s midterm elections, and some believe that rising inflation could cause Republicans to lose one or both houses of Congress, dealing a political blow to the Trump administration.
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