Hopes for a more accommodative monetary policy were dashed this week as the Federal Reserve kept interest rates steady. Fed Chair Jerome Powell cited the “unknowns” of the Iran conflict and existing trade tariffs as reasons for the pause. This news, combined with oil prices topping $111, led to a significant retreat in global stock prices.
The energy market is on edge following threats from the Islamic Republic to attack Persian Gulf oil and gas infrastructure. These statements followed an attack on the South Pars field, a critical part of Iran’s energy sector. Consequently, Brent crude rose 3.9%, and U.S. natural gas futures saw a 4.6% increase on the Henry Hub.
Market analysts are warning that these disruptions could lead to a “debilitating wave of inflation” if they persist. Higher costs for fuel and raw materials are already impacting the wholesale level, where U.S. inflation recently hit 3.4%. This environment makes it difficult for central banks to justify lowering rates without risking further price spirals.
In Asia, the Nikkei 225 suffered a 2.5% loss, while South Korea’s Kospi fell 1.3%. The Bank of Japan noted that the “future developments warrant attention” as crude oil prices continue to rise. Because Japan is a major energy importer, the stock market there is particularly sensitive to fluctuations in the Middle East.
While the U.S. dollar showed a minor dip against the yen and euro on Thursday, it remains fundamentally strong. High Treasury yields continue to attract capital to the U.S., further pressuring Asian currencies and assets. The intersection of war and economic policy is currently acting as a “macro wrecking ball” for international investors.