Stocks and Oil Prices: Are Markets Done with the US-Iran War?
Stocks and Oil Prices: Are Markets Done with the US-Iran War?
By:Ilya Spivak
Wall Street averted panic as the US went to war against Iran, but surging oil prices are a lasting risk.
- ISM manufacturing PMI posts strongest two months since mid-2022
- Crude oil prices spike after the US and Israel strike Iran, kill Khamenei
- Markets dial up Fed rate cut bets through 2027 despite inflation risks
US stock markets opened the week on uneasy footing even as economic data delivered an upside surprise. The Institute for Supply Management (ISM) reported a second consecutive month of expansion in manufacturing activity, marking the strongest two-month stretch since mid-2022. After spending most of 2023 and 2024 mired in contraction, the sector is showing signs of regaining momentum.
The latest report showed that the pace of activity growth cooled only slightly in February after surging to the fastest since August 2022 in the prior month. Traders seemed to be too taken with blistering geopolitical news-flow to notice, however. That’s after the United States and Israel struck Iran over the weekend.
Stock markets gyrate as the US and Israel strike Iran
S&P 500 futures gapped sharply lower at the weekly trading open before seesawing as headlines evolved. Early fears of a prolonged conflict began to give way to speculation that the operation may be limited in scope, aimed at reshuffling the regime in Tehran without committing to a long-term deployment. For now, the markets appear to cautiously entertain the possibility of a relatively contained engagement rather than a replay of the US invasion of Iraq in 2003.
Crude oil still seems to be the clearest transmission channel from the fighting into financial markets. Prices briefly surged to around $75 per barrel after gapping higher at the weekly open. They pared gains to end the day closer to $71, a rise of 5.56%. That’s the biggest daily increase since June last year, when Israel and Iran traded fire. The move builds on a rally that began at the start of 2026 as expectations of a global supply glut began to seem suspect.
Several forces appear to be converging. Unrest in Iran since December, intensified enforcement against Russia’s “shadow fleet” oil tankers, and the capture of Nicolas Maduro are hampering the flow of sanctioned oil supply. China, the world’s largest crude importer, has relied heavily on discounted barrels from Russia, Iran and Venezuela. Replacing that volume at market prices would require significant adjustments in sourcing and inventories.
Crude oil, China and inflation: derailing Fed rate cut hopes?
If Chinese demand shifts toward suppliers such as Saudi Arabia, Iraq or Brazil, inventories not positioned for that incremental demand could tighten quickly. In that environment, oil prices may remain elevated as markets recalibrate.
The inflation implications are significant. Historically, changes in crude oil prices take roughly a month to filter into headline consumer price index (CPI) figures. That raises the risk that upcoming inflation reports will point to faster price growth. Indeed, the manufacturing ISM survey’s prices-paid component jumped sharply higher in February even as employment remained in contraction mode.
This complicates the Federal Reserve’s task. Markets currently price in 50 basis points (bps) of rate cuts this year and 75 basis points in easing through 2027 – more dovish than the Fed’s own projections. Policymakers have so far resisted that outlook, citing persistent inflation risks.
If oil-driven price pressures intensify while manufacturing stabilizes, the divergence between market expectations and Fed guidance may widen. In that scenario, risk assets could struggle to sustain rebounds, particularly if investors begin to doubt that the anticipated policy backstop will materialize.
Ilya Spivak, tastylive head of global macro, has over 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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