- Crude oil prices have surged by over 2.7%, pushing Brent futures above $107 per barrel and WTI toward $103.
- The market is caught in a high-stakes tug-of-war between a massive Saudi supply shock and 88.7% Fed hike odds.
- Oil shock could keep the Fed hawkish, testing gold, silver, crypto and equities as inflation risks rise.
Oil is suddenly becoming the macro market’s biggest inflation threat. A Saudi East-West pipeline was temporarily shut down after drone attacks, which pose a threat to up to 4% of global supply, pushing Brent futures above $107 a barrel and WTI toward $103.
The oil surge is colliding with hawkish Fed bets, with 10-year Treasury yields already hovering near 5%. According to the CME FedWatch Tool, traders have aggressively repriced the likelihood of a Fed rate hike this week to 88.7%, up significantly from a pre-inflation reading of roughly 67% ahead of Wednesday’s decision.
Why Are Gold, Silver and Crypto Falling Despite Geopolitical Risk?
Gold, silver and cryptocurrencies are falling as markets focus on the Federal Reserve’s policy direction rather than traditional geopolitical safe haven demand, even as Middle East supply worries increase. At the time of writing, spot gold trades at $4,346, down 1.43%, silver at $63.67, down 2.33%, while Bitcoin (BTC) trades at $77,732, up 1.21%.
The dominant driver is the sharp rise in odds of a Fed rate hike at this week’s meeting. The odds are in the mid-to-high 80s percent chance range for a 25 basis point.
These odds have climbed sharply following hotter inflation data and the oil-price surge. As long as gold, silver, and BTC are not yielding assets, the higher the expected policy rates and real yields, the more expensive it becomes to hold these assets.
How Could Higher Oil Prices Impact the USD, Treasury Yields and Equities?
High oil prices, particularly the price of Brent above $107, provide an inflationary shock, which usually boosts the dollar, increases Treasury yields, and puts pressure on equities. At press time, the U.S. Dollar Index (DXY) was trading at 99.56, up 0.44% on the day, with yields elevated.
Higher oil prices and yields are a double threat for stocks. Higher energy costs can push down corporate profits and a higher discount rate can lessen the value of future profits, especially for growth and technology stocks.
At press time, equity futures reflected this pressure, with S&P 500 futures down about 0.7% and Nasdaq-100 futures declining more sharply by 1.84%. Risk-off could intensify if Brent stays above $107 and the Fed hikes by the widely expected 25 bps.
Related: Here’s What July’s Fed Rate Decision Is All About
What Should Traders Watch Immediately After the Fed Decision?
Immediately after the Fed decision, traders should monitor the rate decision and vote, statement language on inflation and energy, the Summary of Economic Projections and dot plot, and Chair Warsh’s press conference. Traders should also monitor Treasury yields, the dollar, equities, gold, silver, BTC, crude oil and volatility gauges for signs of a hawkish or “look-through” response.
Related: Bitcoin Faces Inflation Crosswinds as Iran Conflict Sends Oil Prices Higher
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