US President Donald Trump has set a Tuesday night deadline for Iran to agree to a deal that includes reopening the Strait of Hormuz to all marine traffic, and if that deadline passes without progress, we could see a significant escalation in military action.
This face-off is the single biggest variable across every asset class, from oil to equities, meaning investors should be bracing for a volatile few days ahead.
There’s real uncertainty around how long this conflict will continue, which is naturally rattling even the most seasoned investors, said an industry expert.
"We're heading into one of the biggest weeks for markets since the conflict in the Middle East began," according to Josh Gilbert, Market Analyst at eToro.
US futures are down ahead of a big day, despite the stronger Wall Street session on Monday, where the S&P500 posted its fourth straight day of gains. Investors shouldn’t get carried away, though. This is relief after plenty of pain, and there is still a huge and unpredictable week ahead.
Oil remains at the centre of every market move right now. WTI crude has pushed above $113 a barrel overnight, with Brent not far behind, above $110, both up over 80% YTD.
There's been plenty of back and forth on ceasefire terms, but nothing concrete has landed yet, meaning oil will stay elevated for the time being.
Beyond geopolitics, the data calendar this week is also looking loaded; we've got PCE inflation and GDP on Thursday, followed by CPI and Michigan consumer sentiment on Friday.
Those readings will give us the first real signal on whether the oil shock is starting to filter through to broader consumer prices. The ISM Services data on Monday already showed the US service economy expanding at a slower pace with input prices accelerating; a classic stagflationary signal that will make the Fed's job harder.
Fed policymakers have the luxury of remaining in "wait and see" mode for now thanks to the solid March jobs report, but that window could close quickly if inflation starts picking up rather than easing.
This is a market being driven by headlines. We saw it on Monday, when reports of a potential 45-day ceasefire framework sent equities higher and oil lower, only for Trump's rhetoric about destroying Iranian infrastructure to pull the mood back in the opposite direction, stated Gilbert.
You can see why investors are sitting on their hands right now, but the rebound we saw in markets last week is a great example of rallies that investors miss when they move to the sidelines, he added.
