Market Brief: Soaring crude prices wreak havoc in financial markets 

Foreign exchange markets are in upheaval after Iran war fears drove global crude prices nearly 30 percent higher over the weekend—but conditions could stabilise in coming hours if G7 countries tap their strategic petroleum reserves. According to the Financial Times, finance ministers from the major advanced economies are now discussing a co-ordinated release of oil reserves, with an announcement expected this morning. The dollar is giving back some of its weekend gains but—along with the Canadian dollar—is still up from its late-February levels, having climbed against its more vulnerable energy-importing rivals.

Brent crude surged past $130 a barrel when markets opened last night, its first foray into triple digits since Russia's full-scale invasion of Ukraine in 2022, after Israel struck 30 Iranian fuel depots on Saturday, reinforcing fears of prolonged disruption to global energy supplies. A near-complete shutdown of the Strait of Hormuz—through which roughly a fifth of the world's seaborne oil and a quarter of global liquefied natural gas typically pass—has severed the main export artery for Saudi Arabia, Iraq, Kuwait, Qatar and the UAE, stranding an estimated 150 vessels and forcing producers to suspend shipments and shutter fields with nowhere to store output. The White House has offered naval escorts and up to $20 billion in government-backed insurance for tankers willing to transit the strait, but owners remain broadly unwilling to put valuable ships* and crews within easy striking range of tens of thousands of Iranian drones, missiles and mines.

Treasury yields are holding firm despite Friday's non-farm payrolls report showing US labour markets slowing in February—something that might, under different conditions, clear the way for more Federal Reserve easing. Unemployment edged up to 4.4 percent and net job creation fell by 92,000, and although roughly a third of the losses were attributable to a healthcare strike, nearly every sector weakened. There has been no net private-sector job creation since last January.

Policy expectations have ratcheted higher across the advanced economies, reflecting a sharp jump in global inflation fears. Astonishingly, there are almost two full rate hikes now priced in for the European Central Bank by year end, nearly one in the UK, one in Canada, and only one cut in the US. This could prove overdone, especially if the conflict reaches an early resolution.

Geopolitical risk indices have soared, raising measures of implied volatility across asset classes to their highest levels since last year's "Liberation Day" tariff debacle. The moves point to heightened awareness of the risks a prolonged Middle Eastern conflict could pose to the global economy—and to concerns about the apparent lack of planning behind the United States' campaign against Iran**.

Speculative positioning appears* to be playing a limited role. Movements in energy markets have been driven primarily by refiners and other end users rather than a surge in long positions on benchmarks. Equity markets have not seen a jump in short interest, and option skews across most major currency pairs are consistent with a reversal of the short-dollar trades that dominated earlier this year, not a renewal of directional bets.

The Canadian dollar is outperforming most of its major counterparts, consistent with a well-established pattern: in the 21st century, it has tended to track oil most closely when prices are between $75 and $100, as the country's terms of trade improve and investors channel money into the energy sector. Its gains could slow in the days ahead if prices remain above the $100 threshold, where the relationship tends to weaken as demand destruction and higher borrowing costs begin to drag on the world economy.

US data releases in the coming days will be largely stale. February's consumer price index and January's Job Openings and Labor Turnover report on Wednesday, followed by personal income and consumption figures on Friday, will offer insight into how price pressures and the labour market were evolving before the war—but they have been overtaken by events and are unlikely to move markets.

Market participants should brace for more whiplash. The disruption in global commodity markets may be without postwar precedent, but much depends on duration. If the warring countries reach a détente—or the Trump administration follows its prior playbook and retreats from its regime change demands—oil prices could reset violently, unleashing a correction across fixed income and currency markets.

Please note: Regular service will be interrupted tomorrow (and potentially Thursday) due to travel and speaking commitments, but I will update you on any major market shifts.

*The waitlist for new tankers is at least three years, implying that a shipowner could lose millions in profits if one is lost.

**Who could possibly have foreseen that launching military strikes against a heavily-armed country sitting astride the Strait of Hormuz might generate turbulence in energy markets?

***It is, admittedly, difficult to quantify this.

****This is just a pretentious way of saying that punters are not placing new bets on big moves in specific currency pairs.

Market Overview

Notes: DXY: Dollar index, ON: Overnight movement, DMA: Daily Moving Average, Pivot points are calculated on a one-month basis, 3-month and 10-year spreads are against USD, Implied V.: implied at-the-money option volatility

Economic Calendar