Investors get inflation ‘wake-up call’ as Trump fires up oil prices

Global investors had a stark reminder of how quickly the oil market can reignite ⁠concern ⁠about inflation and volatility, after U.S. President Donald Trump said ⁠on Wednesday that an interim agreement with Iran to end the war “is over”.

Inflation-sensitive assets such as bonds and gold tumbled in the face ​of a 5% surge in oil.

“It’s a big wake-up call for markets,” said Aneeka Gupta, director of macroeconomic research at Wisdomtree.

The expectation had been “that we were likely to start to see the flow of oil ‌coming back into the markets, and we saw inflation expectations ‌being dialled down”.

Oil prices were inevitably the first to react to news from the Gulf and jumped as much as 6% on Wednesday to a two-week high after Trump’s remarks.

That said, ⁠Brent futures at close ⁠to $78 a barrel are far from the $100-and-above at which they traded for two months from mid-March, which had policymakers’ ​inflation gauges flashing bright red.

Prices had fallen rapidly after the U.S. and Iran signed an initial memorandum of understanding in June, reopening the Strait of Hormuz, as oil from tankers that had been stranded inside the Gulf hit the market, causing a mini-glut.

The question is where prices will settle once the mini-glut passes. Will the latest developments make tankers less willing to re-enter the Gulf?

The news hit at an inconvenient time for stocks. ​Some doubt is creeping into the AI story, as traders ask whether companies that have raked in billions of dollars for chips and AI models will keep doing so ⁠if ⁠supply bottlenecks ease, or if demand does ⁠not pan out as they expect.

Since the ​Nasdaq’s record high on June 1, the makers of memory chips have been subject to a volatile downward correction. An ETF of memory chip shares has fallen nearly ​8%, while the Philadelphia semiconductor index is down 5%.

The ⁠world beyond AI has fared much better. The equal-weight S&P 500, which strips out the outsized impact of the largest stocks, has risen nearly 3%, and Europe’s “AI-poor” STOXX 600 is up 4%.

Bond yields jumped after Trump’s comments, taking their cue from oil prices, as traders raised their expectations of price increases and positioned for higher interest rates reversing recent weeks’ reduction in bets on hikes.

Contracts tracking euro zone CPI inflation expectations in one year’s time rose 14 basis points (bps) to 1.992%, and traders were last pricing in around 35 bps of further tightening this year from the European Central Bank, up from 25 ⁠bps on Tuesday.

They saw 36 bps of tightening from the Federal Reserve, according to LSEG data on the Fed Funds market, and 32 bps ⁠from the Bank of England.

Still, markets expect consumer inflation in the U.S. to be around just 2.15% in a year’s time, down sharply from the 4.2% figure recorded in May.

Shorter-dated bonds, which are sensitive to interest rate expectations, were the biggest movers.

Germany and Britain’s 2-year bond yields both jumped 10 bps to trade at their highest in just under a month. The reaction in the U.S., which is an energy exporter, was less dramatic with 2-year yields up 5 bps.

Volatility had been largely absent for much of the past few months, but Wednesday’s news sent several measures higher.

The VIX volatility index had been back to its prewar levels by early June, bar a brief spike on worries about high-flying tech stocks. A similar story can be told for volatility gauges for bonds and currencies — an almost unbroken decline over recent weeks, and a jump on Wednesday.