Commodity traders bet on a swift recovery in crude flows while bond markets brace for embedded inflation and hawkish central banks.
Financial markets are struggling to interpret the implications of a sudden halt to tanker traffic through the Strait of Hormuz, a corridor that normally carries about a fifth of the world’s oil.
The disruption has sent crude prices back above 100 dollars a barrel and pushed natural gas prices higher. Traders across asset classes are now trying to judge whether the shock will fade quickly or mark the start of a more prolonged supply squeeze.
“The key risk is that with 20% of global production unable to make its way through the Strait, oil prices could move higher for longer”
In a note to clients, Bank of Ireland group chief economist Conall Mac Coille said the question dominating markets is whether oil shipments can resume soon.
He pointed out that commodity markets appear relatively relaxed. Futures curves for Brent crude, for example, imply a drop from today’s price of about 100 dollars a barrel to roughly 75 dollars early next year. “The futures market is making the assumption that the disruption will be short-lived,” he said.
At the same time, he highlighted that the reality on the ground is more precarious. About 20% of global supply is currently not moving out of the Gulf and there is little clarity on when that might change. He noted that the US Treasury secretary Scott Bessent has urged the creation of an international coalition to escort tankers “as soon as it is militarily possible,” underlining the uncertainty surrounding the timetable for restoring normal flows.
Bond markets turmoil fears
Bond investors have taken a different view. While equity markets have seen moderate declines this year, the shift in fixed income has been more pronounced.
German 10‑year yields have climbed to 2.95%, close to levels not seen since 2011. “Bond markets are now pricing in persistently higher inflation,” Mac Coille said, pointing to the jump in inflation swap rates. The one‑year euro swap has risen to 3%, while the five‑year and ten‑year swaps have moved sharply higher as well.
Currency markets have reacted in line with broader risk aversion. The dollar has strengthened, trading at 1.145 to the euro, supported by safe‑haven flows. Sterling has also gained ground as expectations of near‑term Bank of England rate cuts have dissipated.
Rate expectations across major central banks have shifted rapidly. Investors now anticipate that the European Central Bank will raise rates to 2.25% by July and potentially to 2.5% by the end of 2026. The Bank of England is seen as likely to increase rates to 4%, while markets expect only one cut from the US Federal Reserve this year. Mac Coille described market pricing as “exceptionally volatile,” moving in step with energy prices and geopolitical news.
The ECB, Bank of England and Federal Reserve are all due to meet next week. Although none is expected to change policy rates immediately, Mac Coille expects their tone to lean firmly towards containing inflation expectations.
He argued that policymakers will want to avoid a repeat of the period after Russia’s invasion of Ukraine, when inflation proved far more persistent than initially anticipated. “The textbook response to an energy price shock is to rein in inflation expectations,” he said.
He added that although central banks will be influenced by the memory of 2022 and 2023, there are significant differences today. The earlier surge in inflation followed the pandemic, when governments ran very large fiscal deficits and central banks maintained extremely accommodative monetary policy.
Household demand had also been boosted by pandemic savings, while supply chains were still under strain. Those factors are not present to the same degree this year.
Even so, Mac Coille cautioned that an extended shutdown of Gulf exports would challenge the relatively calm assumptions embedded in commodity markets. Futures curves suggest that crude will eventually fall back in line with pre‑crisis expectations, but that depends on a restoration of traffic through Hormuz.
“The key risk is that with 20% of global production unable to make its way through the Strait, oil prices could move higher for longer,” he said.
If the supply shock eases, he expects the impact on headline inflation to be brief. Yet the longer the disruption continues, the more pressure will build on central banks to raise rates, and the more likely it becomes that the bond market’s more pessimistic outlook will prove closer to the mark.
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