By: Editorial Team, StoneX Media
The Strait of Hormuz remains effectively shut, talks between the United States and Iran have produced no breakthrough, and crude oil prices keep grinding higher. The German DAX index is setting record highs through all of it, held up by corporate earnings and optimism around artificial intelligence rather than by any improvement in the macro backdrop. That gap between what commodity and bond markets are pricing and what equity markets are pricing is the part worth watching. It matters because the bond market, not the oil market, is the channel that usually turns an energy shock into an equity repricing.
Fawad Razaqzada is a Market Analyst at StoneX Media in London with more than 12 years analyzing forex, indices, commodities and cryptocurrencies, combining macroeconomic reading with technical analysis and price action.
"If crude continues higher, investors could start worrying about another inflationary shock that could push yields even higher, putting pressure on bond prices and ultimately make equities much less attractive, especially growth stocks", Razaqzada says, setting out the sequence in full. Bond yields have risen alongside crude oil prices through the standoff between the United States and Iran and have stayed consistently high across the curve, which is the persistent warning sign in fixed income. Higher energy costs feed inflation expectations, inflation expectations feed yields, and higher yields compress the valuation case for the long duration growth names that have led equity markets. Notably, the pressure never has to arrive through the oil price itself, since the discount rate does the work.
The German DAX index has posted repeated all-time highs despite a deteriorating energy and rates backdrop, and the support underneath it is corporate, not macroeconomic. In Razaqzada's reading, "strong corporate earnings and continued optimism around AI are helping to cushion the market against higher energy prices", which is a different kind of foundation from an improving macro picture. The technical structure has stayed constructive, with higher highs, higher lows and rising moving averages leaving the path of least resistance to the upside. Even so, he flags that any signs of a reversal in this environment "should not be taken lightly", because the cushion is made of sentiment and earnings rather than cheaper energy or lower yields.
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--- Written by Gus Farrow, Senior Manager, StoneX Media
--- Expert: Fawad Razaqzada, Market Analyst, StoneX Media
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