Oil: The Hidden Detonator of the Global Economy

The war involving the United States, Israel and Iran has once again revived inflation fears across financial markets, undermining the outlook for global bonds – the latter had only delivered their strongest year-to date performance since the pandemic.

Markets have reacted quickly by repricing rate expectations. For instance, traders have reduced the probability of a second Fed rate cut this year to around 50%, whereas as recently as Friday they were anticipating two cuts. This has triggered a selloff in US Treasuries, particularly in the short end of the curve.

Moreover, investors have also shifted their outlook towards the European Central Bank and are now pricing in a 50% probability of a rate hike this year – while the market assigned only a 40% probability last week. In the UK, the market, which had previously expected at least two rate cuts, is now pricing in only one.

Oil sits at the center of this chain reaction. When oil rises, bonds fall. When bonds fall, yields rise. When yields rise, everything starts to crack — from tech stocks to private credit. The higher oil goes, the faster everything else starts to squeeze. Hopes for imminent rate cuts vanish, consumption weakens, and highly leveraged sectors feel an increasing pressure as deleveraging starts ticking on.

And if financial markets have managed to ignore the AI bubble’s risks so far, they can’t help noticing a sharp surge in oil prices.

Oil is the hidden detonator the market prefers not to think about. Yet the longer the war persists and the greater the risk of a disruption in the Strait of Hormuz becomes, the more likely XBRUSD could surge past the $100+ level.

And should such a surge occur, geopolitics will no longer be the central story. The real consequences will be macroeconomic: renewed inflation pressure, a global repricing of interest rates, and a breakdown of the fragile “soft landing” narrative that financial markets have been relying on. In that environment, the chain reaction would spread far beyond the energy sector, reshaping expectations for growth, policy, and financial stability worldwide.

Trade smart with Headway