24th July - Oil Returns To $100 A Barrel
Oil prices skyrocketed yesterday, as there were no signs of a reduction in tensions in Iran, and the Bab al-Mandab Strait became the second key waterway to have restrictions imposed on it by hostile forces. There has been no news of developments in the supposed ceasefire that was reported at the start of the week. Markets are seeing this as evidence that any talks that were taking place have stalled, and the brief window of optimism has now all but disappeared.
Brent Crude Oil rose just under 6% to close at $101.20 yesterday, while US Oil rose 5.3% to $92.40 per barrel. As mentioned yesterday, if we see oil reach $100, it will be a news event that will resonate across markets. We saw this follow through with US Treasury 2 & 10-year yields reaching their highest point all year. We also saw the ECB hold rates yesterday but made a point to discuss oil and that future rate hikes may be necessary to combat the inflation that is coming.
The concern now is just how high oil will rise this time around. Will we reach $120 as we did earlier in the year, or could it rise even higher as we now have two chokepoints instead of just one? Oil prices will be the key factor affecting global markets for as long as the war in Iran is ongoing, so keeping tabs on the political situation around it will be key. One major factor is that the US mid-term elections take place this November, where elections take place for both the US Congress & US Senate. The war is broadly unpopular in the USA, so there will be a lot of political pressure on President Trump to end the war before elections roll around. They would also need to give enough time for prices to come back down, so politicians are able to say on the campaign trail how prices are now back to normal—high gas prices at election time will not be good for the Republican Party that is currently in power.
Forex
Yesterday saw a significant spike in the US dollar, as investors flocked to the safe-haven asset after ceasefire optimism all but fizzled out. The DXY closed at 101.440, its highest mark at close since the start of the month, gaining on all other currencies on the day. This is all despite some weaker economic figures this month (NFP, CPI & PPI all came in comfortably below expectations), which shows that this move is explicitly a safe-haven bid and not backed by data. Looking forward, this also means that should there be an unexpected truce over the next few days or weeks, then the USD could see more weakness than otherwise could be expected. It will be propped up by the hawkish Fed guidance from this month, but should we see a peace deal, oil will fall back down and so future inflation prints will not look so scary, meaning we could see a significant drop in USD at some point. It is looking more likely than not that we are seeing some asymmetric risk developing for the USD, where there is limited upside but plenty of room for the downside if events play out a certain way. This will be one to keep a close eye on.
The USD/JPY is looking more and more scary for the BoJ, with the USD strength yesterday pushing the pair close to 164.000. The BoJ is being pushed further and further into a corner over its defense of the Yen, highlighted by comments yesterday from the Japanese Finance Minister, who noted that they were "prepared to take decisive steps on forex" and "ready to act appropriately on currency shifts whenever necessary," but fell short of naming any specific levels that were being looked at. The next major level that could be considered may be the 165.000 level. The pair remains one to watch over the coming weeks as the Japanese position is pushed more and more.
The commodity currencies followed the paths of their respective commodities yesterday, with CAD performing very well as oil spiked, while AUD & NZD struggled as precious metals fell on the day (more on metals later). The EUR and GBP were relatively flat as other news from elsewhere took precedence. The EUR was not affected by the ECB's rate hold and, interestingly, was not moved a lot by some hawkish comments from the central bank. I would assume this is because the bank was saying what the market was expecting them to say, so there were no surprises as such. We may see some follow-through on the comments after the effects of the oil spike have worn off, so this could be an interesting asset to follow as we move into the weekend.
Indices
We saw a brutal session yesterday, with the Dow falling 0.97% to 51,711.65, the S&P 500 dropping 1.21% to 7,408.30, and the Nasdaq sinking 2.15% to 25,137.69. The megacap names had their worst day since the tariff-driven selloff of April 2025, and the damage was concentrated exactly where we have been expecting it. Alphabet fell 7% following Wednesday night's earnings, punished purely for raising its capex guidance despite an excellent set of results. Tesla was down 14%, though its problems run deeper than spending alone, with operating income falling 57% and free cash flow turning negative. Energy was the only real refuge on the day, with Occidental and ExxonMobil both up 1.8% as oil pushed higher, while Lockheed Martin surged 10.8% on a strong beat and a record order backlog.
The most interesting news, though, came after the close. Intel reported, and the stock jumped 12%, with revenue of $16.13 billion against $14.42 billion expected and earnings per share of $0.42 against an expected $0.21, double the estimate. Guidance for the next quarter also came in well above consensus, and revenue growth of 25% was the company's fastest in almost 15 years. Their CFO noted that Intel is currently supply constrained, with data center customers demanding more than the company can produce, and that customers "continue to signal a strong and sustainable spending environment."
This is the point I raised yesterday, and I think it is now confirmed. Alphabet announced it would spend $205 billion and fell 7%. Intel, which receives a large share of that spending, beat expectations and rose 12%. The market has not simply turned against AI; it has split the trade in two, punishing the companies doing the spending while rewarding the companies selling them the hardware. That is a meaningful refinement to the balloon deflation idea we have been tracking. It is not that the whole sector is deflating; it is that the money is moving from one end of the supply chain to the other, and the market is repricing both ends accordingly. The question now is whether the suppliers can keep re-rating if the spenders eventually decide to pull back, because that spending is ultimately what funds the whole thing.
Precious Metals
Yesterday saw the burst of the optimism bubble I flagged as a risk in Wednesday's post. Gold fell 1.84% to close around $4,030, giving back the entirety of the gains from the ceasefire rumours earlier in the week, while silver fell 3.26% to $57.50, losing the $60 level almost as soon as it had reclaimed it.
What makes this move so telling is the backdrop it happened against. Yesterday we saw Brent top $100, the war expand into the Red Sea with Houthi attacks on Saudi tankers, confirmed mines in the water south of Hormuz, and Trump threatening to bomb Iranian infrastructure. If safe-haven demand were functioning normally in this market, that combination should have sent gold sharply higher. Instead, it fell nearly 2%, because the same escalation that should have supported it pushed the 10-year Treasury yield up to 4.71%, its highest level of the year. The rate channel overwhelmed the safe-haven channel once again, which is now about as clear a demonstration of the worst of both worlds problem as we are ever likely to get.
For me, this reinforces what I have been saying for months. Gold is currently trading as a pure rates instrument and nothing else, and until the rate picture genuinely turns, there is no catalyst that can lift it. A shooting war has not done it, a closed strait has not done it, and $100 oil has not done it. The only two things that would change this are a ceasefire that brings oil back down and takes the pressure off central banks, or a genuine dovish shift from the Fed, and neither looks close this morning. In the longer term, I still believe there is real value in metals at these levels, but in the short to medium term, as always, it is better to jump on an established trend than to try to catch a falling knife.
Todays Key Market Drivers
GBP & EUR Flash PMIs - These are not significant market movers, but will guide us as to how European industry is feeling against the backdrop of the current climate.
Iran & Oil - Once again, the situation in Iran and the price of oil will dominate, especially as we go into a weekend with so much uncertainty.
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