Inflation, the dollar, and escalating war: markets amid global tensions and new uncertainties

From July 11th to 14th, financial markets were shaken by two opposing forces. The renewed escalation between the United States and Iran brought the Strait of Hormuz back into focus, boosting oil prices and inflation expectations. At the same time, the slowdown in US consumer prices and the solid results of major banks allowed stock indices to recover some of their losses. The picture, however, remains fragile: monetary relief stems from data that precedes the new energy shock.

Hormuz returns to the center of global risk

Tehran has re-closed the Strait of Hormuz following a series of attacks on US targets and facilities in the Gulf. Washington responded by announcing the reinstatement of a naval blockade on Iranian shipping, extending to the country's ports and oil terminals.

The passage remains essential for global oil and gas flows. Even a partial slowdown in traffic is therefore sufficient to increase the geopolitical premium embedded in prices. The market has not yet priced in a permanent closure of the strait, but it recognizes that the margin for military error has diminished.

The most violent reaction was seen in crude oil. Brent gained 9.6% on Monday, closing at $83.30 a barrel, while WTI rose 9.4% to $78.14 . On Tuesday, following new Iranian missiles against a U.S. base in Jordan and further American attacks, Brent rose to around $84.60 . Energy risk has thus returned to being the main channel of transmission between geopolitics and markets.

Stocks: Technology under pressure, banks bucking the trend

The oil shock initially fueled a defensive rotation. The MSCI global index lost 0.9% on Monday, while on Wall Street the S&P 500 fell 0.8% and the Nasdaq 1.6% . Technology was the weakest segment, driven primarily by sell-offs in semiconductors and artificial intelligence stocks. In Europe, the STOXX 600 remained virtually unchanged, with energy rising and technology, travel, and leisure declining.

The picture improved on Tuesday, thanks to inflation and earnings reports. At mid-session, the S&P 500 was up 0.31% and the Nasdaq 0.75% , while the Dow Jones remained close to parity.

The main support came from major U.S. banks. JPMorgan reported a record quarterly profit of $21.2 billion , boosted by trading and investment banking. Bank of America posted a profit of $9.1 billion , while Citigroup enjoyed its highest quarterly revenue in a decade. The financial sector thus offset some of the technology weakness.

Lower inflation, but oil complicates the Fed's situation

In June, the US CPI slowed to 3.5% annually from 4.2% in May, while prices fell 0.4% on a monthly basis. The decline was mainly driven by the previous decline in gasoline prices, which occurred during the temporary truce between the United States and Iran.

The bond market responded immediately. The probability of a Fed rate hike in July fell to 12% , from 42% the previous session. The yield on the 10-year Treasury note, which had risen to 4.62% on Monday, rebounded toward 4.58% . The 2-year note fell even further, reflecting the revised monetary policy expectations.

The problem is temporal: the June CPI does not incorporate the renewed surge in crude oil prices. The market has therefore scaled back the possibility of immediate Fed intervention, but continues to consider at least a hike possible by the end of the year. A prolonged crisis could turn June's relief into a temporary pause, as expected inflation risks being fueled again by energy costs.

Dollar and gold follow rates

On Monday, the dollar had been supported by demand for safe-haven assets and rising US yields. After the CPI, however, the Dollar Index lost about 0.6% , falling to 100.68 , while the euro rose to the $1.145 area.

Gold exhibited less intuitive behavior. On Monday, it fell 3% to $3,998.52 an ounce, despite the military escalation. The strengthening dollar and rising real interest rates prevailed, both negative for an asset that offers no yield. On Tuesday, the movement reversed: with yields and the U.S. dollar falling, the precious metal rebounded 2.02% to $4,080.49 .

The sequence confirms that, in the short term, gold remains more sensitive to expectations about the Fed than to geopolitical risk alone. Expected interest rate differentials also weigh more heavily on currencies than the simple search for safety.

China surprises, but remains dependent on exports

In June, Chinese exports grew 27% year-on-year and imports 36% , bringing the monthly surplus to $125.6 billion . The main boost came from semiconductors related to artificial intelligence and automobiles, while the CSI 300 closed up 2% .

The data supported the outlook for manufacturing and some production raw materials, but did not eliminate China's weaknesses. Domestic consumption and investment remain weak, while Beijing continues to rely on exports as the main driver of growth. For industrial metals, the picture remains mixed: technological demand offers support, but does not yet signal a fully consolidated domestic recovery.

A still unstable balance

Between July 11 and 14, markets shifted from fears of an energy shock to relief over inflation and corporate earnings. Stocks and gold rallied, yields and the dollar fell, but oil remained high.

The decisive variable will be the duration of the escalation in the Strait of Hormuz. If crude oil remains at high levels, the market will have to revise inflation and interest rates upward again, putting pressure on the reactivated rebound in the CPI. As long as geopolitics and macroeconomic data continue to push in opposite directions, volatility will remain high, and the index recoveries are unlikely to be considered definitive.