Bab el Mandeb, US tariffs and inflation: markets are pricing in the geopolitical shock again.

Between Wednesday, July 22nd and Friday, July 24th, financial markets had to absorb a particularly uncomfortable combination: new military escalation in the Middle East, threats to key energy routes, rising bond yields, and a sharp revision of expectations for US technology.

The result wasn't simply a generalized shift in risk aversion. Energy, defense, and parts of European equities showed relative resilience, while Wall Street, government bonds, and precious metals highlighted how quickly geopolitical risk can translate into inflation, monetary policy, and equity valuations.

The risk shifts from Hormuz to Bab el-Mandeb

The decisive factor, once again, was oil. Four tankers loaded with Saudi crude and headed for Asia turned back in the Red Sea after Houthi threats, just as the United States continued its attacks on Iranian targets.

The crisis no longer concerned only the Strait of Hormuz. Bab el-Mandeb, a key passage between the Red Sea and the Gulf of Aden, was once again the focus of operators' concerns. Its closure would force many ships to circumnavigate Africa, lengthening journey times and increasing transportation costs, insurance, and fuel demand.

The Houthi government's claim of responsibility for the attack on two Saudi oil tankers has transformed the threat into a concrete risk. Brent crude soared to $100.69 a barrel , a daily gain of more than 7% . The market has begun to price in the possibility that two Middle Eastern energy arteries could be compromised simultaneously.

Crude oil corrected to $96.78 on Friday, but the move didn't erase the accumulated geopolitical premium. Volatility clearly illustrates the market's fragility: diplomatic rumors can trigger rapid corrections, but supply remains exposed to longer routes, lower exports, and possible physical disruptions.

Energy and defense support Europe

In this environment, European stocks initially showed greater resilience than Wall Street. The STOXX 600 gained 0.6% on Wednesday, reaching a two-week high. Energy, aerospace, and defense directly benefited from rising crude oil prices and international tensions, offsetting weakness in the technology sector.

The following session also brought selling back to European stock markets, but the index recovered on Friday. The picture remains ambiguous: higher revenues from energy companies are supporting part of the market, while sectors more dependent on consumption and credit are facing rising production and financing costs.

Rising oil prices aren't just a boon for producers. For the European economy, they mean higher import costs, pressure on industrial companies, and a potential decline in household purchasing power.

Wall Street discovers the cost of artificial intelligence

In the United States, the main shock to stocks came from Big Tech. Tesla lost about 14% after recording its first cash burn in two years, while Alphabet fell about 7% . Google's parent company also increased its annual investment plan to $200 billion , primarily related to artificial intelligence.

The problem isn't the lack of growth, but the price required to sustain it. After months in which the market almost automatically rewarded AI investments, shareholders have begun to ask when this expenditure will translate into adequate cash flows.

The Nasdaq thus lost around 2.2% , while the S&P 500 lost 1.2% . The decline was therefore not only a consequence of the conflict: oil and yields acted as an accelerant on already very high technology valuations.

The recovery remained incomplete on Friday. More traditional sectors found greater stability, while technology continued to underperform. The divergence suggests that investors are not abandoning equities entirely, but are becoming more selective about the financial sustainability of the tech cycle.

ECB stands still, but the market is looking ahead to the next hikes

The ECB kept the deposit rate at 2.25% , following the increase decided in June, but left the door open to further monetary tightening. Frankfurt emphasized that the full inflationary impact of the energy shock has yet to be felt and that the indirect effects on wages, services, and expectations will also need to be monitored.

The ECB's decision clearly illustrates the dilemma facing central banks. A weak economy would suggest caution, but a renewed surge in energy prices could make it dangerous to ease financial conditions too soon. The market therefore continued to consider further rate hikes likely by the end of the year.

Tensions immediately spilled over into government bonds. The yield on the 10-year U.S. Treasury note stood at 4.679% , while the 30-year note reached 5.163% , near nineteen-year highs. The German Bund also remained near its highest levels since 2011.

Such high yields increase the cost of capital and reduce the relative attractiveness of stocks, especially technology stocks whose value depends on expected profits far in the future.

Gold and Currencies: Safe Haven Isn't Automatic

The geopolitical shock hasn't been a linear boost for safe-haven assets. Gold had risen 1.7% on Wednesday, buoyed by the dollar's weakness and defensive buying, but fell more than 2% the next day.

The rise in oil prices has indeed reinforced expectations of higher rates, penalizing an asset that doesn't offer interest. Silver, platinum, and palladium have also been impacted by rising yields and the strengthening of the US dollar.

On the currency market, the dollar benefited from the US interest rate differential. The euro closed the week down about 0.6% , while the yen remained near its lowest level in 40 years. The dollar's strength added pressure to commodities denominated in the dollar and economies most dependent on energy imports.

Tariffs and growth complete the picture

Further complicating the situation are new US tariffs, ranging from 10% to 12.5% , applied to imports from 60 trading partners , including the European Union and China.

The exemptions for energy, fertilizers, and some critical minerals limited the immediate response, but the measure added further inflationary risk and confirmed the return of protectionism as a structural element of the global economic landscape.

At the same time, the US composite PMI rose to 53.6 , indicating that the US economy continues to expand. However, the strength of services and employment reduces the scope for more accommodative monetary policy, especially as oil, tariffs, and logistics bottlenecks threaten to fuel prices again.

Markets thus concluded the period facing a precarious balance: growth has not yet disappeared, but its cost is rising. Rising energy costs, high yields, and increasingly costly technology investments are transforming geopolitical risk into a directly financial problem.