Financial markets have spent the past two trading sessions reacting to the war in the Middle East, with oil prices climbing above $95 a barrel and government bond yields moving higher.
On Tuesday, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite all fell as oil topped $95 and yields on U.S. Treasury bonds rose. Rising oil prices tend to worry investors for two reasons: they raise costs for businesses and consumers, and they can push up inflation expectations, which in turn pushes bond yields higher as investors demand more compensation for holding long-term debt.
By Wednesday, the picture had partly turned. The Dow edged higher even as oil prices and bond yields continued to climb, and the S&P 500 and Dow both gained ground after the back-to-back losing sessions. That kind of choppy pattern, a sharp drop followed by a partial recovery, is typical when markets are digesting a fast-moving geopolitical story rather than a clear-cut economic data release.
The direct link between the market moves and the Middle East war is the same one showing up in the shipping industry: energy traders are pricing in the risk that supply routes through the Strait of Hormuz and the Red Sea stay disrupted, or get worse, for longer than expected.
Watch oil prices and Treasury yields for the next signal on how markets are pricing the war. A sustained move above $100 a barrel would likely renew pressure on stocks.
Why do rising oil prices push bond yields up?
Higher oil prices can raise inflation expectations, and investors typically demand higher yields on bonds to compensate for the risk that inflation will erode their returns.