Key takeaways

  • Oil prices have again risen above $95 a barrel as the Iran war ceasefire has broken down and fighting has resumed.
  • Equities and bond yields have shown little response, unlike the declines when the war began in late February.
  • Analysts suggest investors are again looking through near-term oil price spikes in the hopes of a resolution to the war.

Just a few weeks ago, investors were counting on a resolution to the Iran war to provide a positive backdrop for the stock and bond markets. But as the fighting has resumed, investors largely seem to be brushing it off. The catchphrase making the rounds is “looking through” the conflict.

Brent crude oil prices rose above $95 per barrel on Wednesday, the highest level in six weeks, after US President Donald Trump threatened a fresh escalation in the war. Investors have grown more confident in looking beyond geopolitical shocks since the war started in late February and a market selloff resulted, amid fears of an energy-driven surge in inflation. But while the ceasefire that began in April powered a relief rally, its unravelling this month has done little to shake the momentum. Instead, attention is now largely focused on expected strength in corporate earnings, particularly the continued artificial intelligence buildout.

In the background, investors remain convinced that despite the conflict restarting, President Trump won’t pursue it for long. “Part of the explanation may be that investors continue to have faith in the so-called ‘TACO trade,’ expecting policymakers to step in should economic growth come under pressure,” explains Anna Macdonald, investment strategy director at Hargreaves Lansdown. (“TACO” is an acronym meaning “Trump always chickens out.”)

This comes as the United States continues to strike Tehran, and Washington warned Wednesday that it would soon launch an attack on a heavily fortified Iranian nuclear site, marking the latest flare-up in the nearly five-month conflict. Oil prices are now up around 30% since the start of July.

“It feels like markets just want to move on from thinking about Hormuz,” says Mike Bell, head of market strategy at RBC BlueBay Asset Management. “Other than oil and gas traders, most investors within both stocks and bonds seem to be paying less attention to [the] rise in oil prices than perhaps they should.”

UBS chief investment officer Mark Haefele says the bank expects both sides to ultimately “seek a path toward a diplomatic solution.” However, he adds that a retightening oil market remains a risk to the broader market.

Oil spike yet to spark inflation surge

Investors may also be waiting to see if and when near-term oil price shocks feed through into price rises and interest rate policy. “Ultimately, it comes down to inflation. Inflation in Europe is 2.8%, and even lower in the UK as of today, at 2.6%,” says Morningstar chief European market strategist Michael Field. “As long as inflation remains low-ish or declining, investors are less concerned about rising oil prices, which they view as temporary anyway.”

US inflation also fell by more than expected to 3.5% in June, as new data showed last week. Still, Field warns of complacency, with fresh shocks likely to take some time to emerge. “I worry that inflation may take months to seep through. We may not have seen the peak yet.”

Both the US Federal Reserve and the Bank of England have resisted raising interest rates in response to the Middle East energy shock so far, while the European Central Bank hiked by 25 basis points in June. However, as of Wednesday, traders were pricing in a 70% chance of at least a quarter-point US Fed hike in September, according to the CME FedWatch tool.

Meanwhile, oil traders have begun warning that an oil supply shock could prove worse now than at the start of the Iran conflict, as global inventories have been drawn down significantly. “Given that the buffers are lower than previously, any such equilibrium would happen at higher prices, such as the prices we are seeing now,” says Naveen Das, senior crude oil analyst at Kpler.