Is the war in Iran nearing its end?… tracking the volatility in oil… what happens if oil prices remain near $100… how will all this impact the Fed… the three signals to watch now
As we were going to press yesterday afternoon, President Donald Trump suggested the fast-moving U.S.–Iran conflict could soon wind down – though his comments also made clear the military campaign may not be finished.
Speaking at a press conference on Monday, Trump said the U.S. is closing in on its objectives after more than a week of strikes coordinated with Israel:
We’re achieving major strides toward completing our military objective…
We could call it a tremendous success right now…or we could go further, and we’re going to go further.
The president struck a careful balance in his remarks, signaling that the war may end soon while also warning that the U.S. could escalate further if necessary.
At one point, Trump described the conflict as “very complete, pretty much.” But moments later, he hinted the mission could continue beyond the initial military strikes. After being asked why Pentagon officials say the conflict is just beginning, Trump replied that “it’s the beginning of building a new country.”
So, while the military phase of the conflict may be nearing its end, the geopolitical consequences could drag out much longer.
The market reaction to Trump’s comments Monday was immediate – and enormous
Wall Street had opened in full risk-off mode as investors grappled with the possibility of a longer war, a deeper oil shock and another inflation scare.
But sentiment flipped after Trump suggested the conflict could be nearing its end, helping spark a sharp reversal in stocks. By the close, the S&P 500 had rebounded from an intraday drop of as much as 1.5% to finish up 0.8%, while the Dow rose 239 points and the Nasdaq gained 1.4%.
The gains are holding as I write on Tuesday in the early afternoon. All three major indices are in the green and were recently trading at their intraday highs.
But the far bigger reaction yesterday and today has come from oil.
As I noted in yesterday’s Digest, at its high on Sunday, crude surged above $115 a barrel.
Yesterday, prices initially eased when G7 energy ministers signaled they were preparing to step in if necessary.
Let’s go to our hypergrowth expert Luke Lango in yesterday’s Innovation Investor Daily Notes:
The G7 convened an emergency summit to discuss a coordinated SPR release – specifically, a 400-million-barrel release from their collective strategic reserves, a jaw-dropping 33% drawdown of the total 1.2 billion-barrel G7 stockpile (which would be the largest coordinated release ever).
Oil fell from $120 to $100.
The next leg lower in prices came later in the day after Trump’s comments – he even floated the possibility that the U.S. might take control of the Strait of Hormuz to secure shipping lanes.
By late Monday afternoon, crude had plunged dramatically from those weekend highs.
And as I write on Tuesday, West Texas Intermediate Crude (WTIC) has fallen to $84 while Brent Crude is down to $88.
Part of the decline reflects this morning’s meeting between G7 energy ministers. They confirmed they’re ready to release strategic oil reserves if necessary, though they have not yet triggered a final decision to open the tap.
Meanwhile, the International Energy Agency (IEA) will hold a meeting later today to discuss the release of oil stockpiles.
In short, some of the panic that gripped energy markets over the weekend is beginning to fade.
Stepping back, the speed of the recent price changes in oil underscores just how sensitive global markets remain to developments in the conflict – and why oil, more than any other asset, has become the real-time barometer of how serious investors believe the crisis could become.
And that’s exactly why what happens next in the oil market matters so much…
What if this war doesn’t end soon
While markets are currently betting on de-escalation, a lot is riding on how quickly this conflict actually winds down.
If oil doesn’t keep falling – or worse, reverses and heads higher – the economic consequences could spread far beyond energy markets.
To see why, let’s go back to Luke from yesterday’s Daily Notes.
He ran the numbers on what sustained triple-digit oil could mean for inflation. His conclusion isn’t pretty:
By my analysis, if oil prices stay around $100 and flow through into higher commodity prices across the whole supply chain (measured by Bloomberg’s Commodity Index ex Gold staying around $80 to $90, versus sub-$70 just a few weeks ago), then we are looking at potential 4-5% inflation in the coming months.
That’s the nightmare scenario policymakers – and investors – desperately want to avoid.
Remember, the Federal Reserve has spent the past two years trying to push inflation back toward its 2% target. A sustained oil spike would reverse much of the progress we’ve made.
Energy is one of the fastest ways inflation spreads through the economy. Higher oil means higher gasoline prices, higher shipping costs, higher airline fares, and more expensive goods across the entire supply chain.
Plus, if inflation suddenly starts climbing again, potentially moving into the 4%-5% range, the Fed might be forced to raise rates. That’s not a scenario Wall Street is pricing for the next 12-24 months. So, if that becomes a real possibility, we’re likely in for a violent market reaction.
Back to Luke:
It is SO IMPORTANT that oil prices get back below $80.
Because sustained oil prices >$100 and inflation back at 5% in this environment would lead to multiple “bubbles” popping at once (AI spending would slow, housing market would break, PE market would break, consumer credit market would break, etc.).
That’s how you kill a bull.
So, with crude back to $84, investors are breathing easier. But from here, it’s follow-through that matters.
Target on the Fed
Heading into this latest flare-up in the Middle East, the market had been steadily pricing in the next phase of the Fed cycle – interest rate cuts.
But sustained triple-digit oil prices would dramatically complicate that outlook.
As I write, the CME Group’s FedWatch Tool shows that traders are betting on a July rate cut – the probability of at least a quarter-point reduction is roughly 59%.
These probabilities have shifted significantly. One month ago, traders put nearly 85% odds on at least a quarter-point cut in July.
Much of that shift reflects the spike in oil prices and renewed fears that inflation could reaccelerate if the conflict drags on.
Right now, the chief concern is “higher for longer.” In other words, if inflation reaccelerates due to sustained higher oil prices, the Fed may have very little choice but to keep monetary policy tighter for longer.
But as we noted earlier – and what Luke fears – oil at $100+ puts hikes on the table.
The key point here is that markets aren’t pricing that outcome right now.
Despite the geopolitical turmoil of the past week, investors are currently betting that the spike in oil will prove temporary – not the start of a new inflation cycle.
That’s why the sharp drop in crude prices over the past 48 hours has mattered so much.
If oil stabilizes somewhere in the $80–$90 range, the broader inflation outlook probably doesn’t change much. The Fed can stay on its current path, rate cuts later this year remain plausible, and the bull market likely stays intact.
But if crude suddenly reverses and pushes back toward $100, that’s when things could change quickly.
And the past few days have shown just how quickly sentiment in the oil market can swing.
Three signals investors must watch…
First, whether the conflict itself actually begins to cool…
It’s one thing for political leaders to talk about winding the war down. It’s another thing entirely to see the violence truly de-escalate – fewer strikes, calmer rhetoric, and a clear path toward ending the fighting.
If bombs keep falling and tensions remain high, markets will likely continue pricing in the risk of supply disruptions.
Second, oil prices themselves…
If crude keeps trending toward $80, the inflation scare fades quickly. The bull comes roaring back. If not, uncertainty lingers, and today’s market gains reverse.
Third, inflation data in the weeks ahead – but not with tomorrow’s CPI report, which won’t reflect this oil spike.
Bottom line: If higher energy costs begin bleeding into broader commodity prices and transportation costs, we’ll start seeing it show up in inflation reports – and the Fed will notice. For now, though, markets appear to be betting that the worst-case scenario won’t happen.
So, oil is falling… stocks are rebounding… and investors are cautiously returning to risk assets.
The next few weeks will determine whether that bet proves right.
We’ll keep you updated here in the Digest.
Have a good evening,
Jeff Remsburg
