Key takeaways
- Oil and gas prices surge amid Iran war
- Bond yields rise on inflation concerns
- U.S. enters conflict on solid economic footing
Energy prices move sharply higher
Energy markets drove this week’s market volatility, with the conflict in Iran triggering a sharp rise in oil and natural gas prices. Through Thursday’s close, West Texas Intermediate crude oil was up roughly 17% from last Friday, pushing prices close to $80 per barrel. Moves in natural gas were even more pronounced, with Dutch TTF — a benchmark for European gas prices — climbing more than 50% over the same period.
This represents a fairly large shock to global energy markets, with effects rippling across the global financial system. Equity markets have responded in largely textbook fashion, with the U.S. outperforming non-U.S. markets amid the drawdown and defensive sectors of the market generally faring better than cyclical ones.
Through Thursday’s close, the S&P 500 Index was down roughly 0.7% on the week. In Europe, the STOXX 600 fell approximately 4.5%. Emerging markets experienced the largest decline, with the MSCI Emerging Markets Index plummeting by about 8%.
This uneven performance reflects structural differences in energy exposure across various regions. The United States, for instance, is now a net exporter of oil and is far less vulnerable to energy shocks than it was decades ago. Europe and some emerging market economies, meanwhile, remain more directly exposed to imported energy costs.
Yields spike on inflation worries
Sovereign bond yields also moved higher across major markets this week. Part of that move reflects a reset, as yields had fallen sharply prior to the onset of the conflict amid concerns about AI-related disruption. This week’s energy shock reversed some of that decline.
But part of the rise in yields also reflects renewed inflation concerns. Higher energy prices increase the risk that inflation could become stickier in the short to medium term, raising the possibility of a more hawkish stance from some global central banks.
In the U.S., the 10-year Treasury yield rose roughly 18 basis points on the week through Thursday. German bond yields moved by a similar magnitude, while the UK 10-year gilt yield climbed about 31 basis points, reflecting the UK’s sensitivity to natural gas prices.
U.S. economy showed momentum into late February
The U.S. economy entered the conflict on solid footing, as evidenced by the recent stretch of strong corporate earnings, including five consecutive quarters of double-digit earnings growth.
The latest ISM (Institute for Supply Management) surveys point to a U.S. economy that, into late February, was growing at a roughly 3% clip. While that doesn’t rule out a material disruption from the Middle East conflict, it does suggest the U.S. entered this period with solid fundamentals in place to absorb the rise in energy prices.
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