Oil prices jumped 7% to break through $100 a barrel after Iran-aligned Houthis attacked two Saudi oil tankers in the Red Sea, threatening another critical artery for global energy supplies. President Donald Trump responded with warnings of "major military punishment," raising fears the conflict could widen and trigger a sustained energy shock.
Brent crude is up nearly 40% this month. With global oil reserves already depleted, the market is pricing in a scenario that central bankers dread: a protracted supply disruption that stokes inflation and undermines years of monetary tightening. For weeks, investors had largely ignored simmering U.S.-Iran tensions. That complacency ended overnight.
The Bond Market Rout
Longer-dated Treasuries took the worst of the selling. Thirty-year Treasury yields are now marching towards a 19-year peak of 5.201%. Benchmark 10-year yields hit a new 18-month high of 4.7135% on Friday. Any lingering hope of central bank policy easing has evaporated. Markets now see a one-in-three chance of a rate hike from the Federal Reserve as soon as next week — a sea change from merely a week ago. Two moves by January next year are fully priced in.
The shift reflects a brutal reality: if oil stays elevated, inflation expectations could de-anchor, forcing central banks to abandon their cautious stance and tighten further. That's a fiscal and economic nightmare for governments already struggling with debt burdens and sluggish growth.
Asian Markets Tumble
The combination of surging oil and rising rates sent Asian shares deep into the red. South Korea's KOSPI fell 6%. Japan's Nikkei slid 2.8%. Local semiconductors couldn't find relief even in Intel Corp's bumper results, which sent its shares up over 4% after the bell in the U.S.
AI Spending Concerns Mount
Adding to the gloom, the AI trade is showing further signs of fatigue. Investors are growing uneasy about higher capex plans by tech giants. Tesla shares tumbled around 14% on Wall Street after it posted its first cash burn in two years. Alphabet fell about 7%, with the Google parent also burning through cash as it ramped up AI spending.
The market's message is clear: the AI boom isn't immune to rising rates and tighter financial conditions. Companies that spend aggressively on infrastructure without immediate returns are being punished.
What's Next
Nasdaq futures are slightly lower, but European bourses are headed for a steady open. All eyes are on PMI surveys due in Europe, Britain and the United States. The U.S. measure is seen holding on to its relative strength. Any upside surprises could see investors push the chance of a July Fed rate hike to 50/50.
Key developments that could influence markets on Friday include UK retail sales data for June and UK, EU and US flash manufacturing, services and composite PMIs for July.
Amid all the mayhem, Trump's latest tariff wheeze raised barely an eyebrow, though the timing of making U.S consumers pay yet more for imports seems economically dubious.
Why This Matters:
The Red Sea attack exposes Europe's vulnerability to energy shocks it can't control. With oil up 40% in a month and bond yields surging, the fiscal space for governments to respond is shrinking fast. Central banks face an impossible choice: tolerate higher inflation or tighten into a slowdown. For European economies already struggling with high energy costs and sluggish growth, a sustained oil shock could tip the balance towards recession. The AI spending concerns add another layer: if tech giants burn cash without delivering returns, the productivity gains Europe needs to compete globally won't materialise. This isn't just a market story — it's a competitiveness crisis in the making.