Today Fundamental Analysis: Oil Prices Slide as Fears of Further Escalation Ease

US stock futures were largely flat early Wednesday. The major US averages had gained on Tuesday, supported by falling Treasury yields and lower oil prices, with the S&P 500 and the Dow up 0.3%, and the Nasdaq rising 0.8%. Bond yields eased significantly on Tuesday, providing some relief to equity markets ahead of the inflation data and Nvidia’s results.

Asian markets were mostly positive, led by South Korea’s Kospi, up 2%, and Japan’s Nikkei up 0.6%.

Oil prices fell sharply on Wednesday as markets grew more optimistic about de-escalation in the Middle East and the US shifted toward economic sanctions instead of immediate military action against Iran. Brent crude and WTI fell 2.5% to $86.22 and $80.25 respectively. Lower geopolitical risk also helped bond yields retreat from recent highs, providing some relief to broader financial markets.

In the crypto market, Bitcoin is trading around $79,000 on Wednesday after briefly breaking above $81,000, pausing a powerful rally that had lifted it more than 24% in just three days.

Gold remains bullish as it is trading around $4,650, supported by a weaker US dollar and expectations of softer US inflation. Renewed optimism over the reopening of the Strait of Hormuz has pushed oil prices lower, easing inflation concerns and reducing expectations of a September Fed rate hike. Gold is also benefiting from US trade tensions, and the Treasury’s expanded bond-buyback program announced last week.

The immediate focus is the July core PCE inflation report, the Fed’s preferred inflation gauge. Core PCE is expected to remain at 3.2% on a yearly basis. A softer reading could weaken the dollar and Treasury yields, supporting gold, while a hotter reading could revive Fed rate-hike expectations and trigger a correction.

However, the main event this week is Fed Chair Kevin Warsh’s speech at Jackson Hole on Friday, which could provide stronger guidance on the Fed’s policy outlook and determine whether gold can sustain its move toward and potentially above $4,700.