Will war end soon? Oil prices and stocks swing with the shifting signals.
President Donald Trump has injected plenty of uncertainty into the world economy with his trade policies and tariffs, interventions in Venezuela, and withdrawal from major global institutions. But his war on Iran might prove to be his biggest jolt yet to financial markets.
As the war entered its second week, with no end in sight, and Iran standing firm against the U.S. and Israeli bombing campaign, oil prices soared, and stock indexes fell in much of the world.
Then came some rebound as stock investors focused on hopes that Mr. Trump would find an off-ramp from war before damage to the global economy became too severe.
Why We Wrote This
Oil prices retreated below $100 a barrel on Monday, on investor hopes that the conflict in Iran will end relatively soon. But energy costs remain elevated, and volatile markets are a sign of uncertainty for the global economy.
Over the weekend, benchmark Brent crude prices soared from $92 a barrel to more than $119 before settling back below $90 by Monday's end. That鈥檚 the highest level in four years. The VIX, a measure of market volatility from the Chicago Board Options Exchange, reached its highest point since last April, when Mr. Trump implemented his broad-based 鈥淟iberation Day鈥� tariffs. And stock indexes fell around the world, including Japan鈥檚 Nikkei (down more than 5%) and Germany鈥檚 DAX (down nearly 1%).
American stock indexes plunged at their morning opening but recovered by the end of the trading day as governments weighed options to ease oil-price pressures, and as comments from the president struck a more positive tone. The U.S. 鈥渃ould do a lot鈥� about the stall in oil tankers passing through the Strait of Hormuz, he told CBS News in an interview, without sharing details. 鈥淲e鈥檙e very far ahead of schedule鈥� on the U.S.-Israeli offensive campaign against Iran, he added.
Meeting in Geneva on Monday, some of the world鈥檚 most economically powerful democracies, known as the Group of Seven, considered jointly releasing oil from their strategic oil reserves. They ultimately put off the move, as Mr. Trump is reportedly considering a range of options to ease gasoline prices, which have soared from a national average of $3 a gallon to $3.48 over the past week. This could include drawing down strategic reserves or limiting exports of U.S. crude.
Whether the war will wind down speedily remains uncertain.
鈥淪ometimes, you get these conflicts where you鈥檝e got one power that has overwhelming technological and military advantage and you expect the job to be done quickly. And it isn鈥檛,鈥� says , a finance professor at Duke University and author of the 2021 book 鈥�.鈥� Then 鈥減eople think that the U.S. might get into a longer term conflict, even if boots are not on the ground. This greatly increases the risk.鈥�
That鈥檚 especially true of wars over energy. Oil and gas play a key role in powering economic growth globally. When supplies are constricted or cut off for more than a few days, the risks to growth around the world rise.
Ed Yardeni, a market strategist, has raised the odds of a U.S. stock market meltdown this year from 20% to 35%.
Iran鈥檚 moves over the weekend and the responses from the United States and Israel have heightened tensions.
On Sunday, Iran replaced its supreme leader, Ayatollah Ali Khamenei, who was killed in joint U.S.-Israeli airstrikes, with his son Mojtaba Khamenei. Mr. Trump, by contrast, had been pushing for a say in the choice of leadership.
鈥淚鈥檓 not going through this to end up with another Khamenei,鈥� on Wednesday. 鈥淲e have to make sure it鈥檚 somebody that鈥檚 reasonable to the United States.鈥�
Secretary of Defense Pete Hegseth echoed the president鈥檚 hard line in an interview with CBS鈥� 鈥溾�� on Sunday, during which he predicted more U.S. casualties in the war. 鈥淚t stiffens our spine and our resolve to say this is a fight we will finish,鈥� he said.
Besides closing the Strait of Hormuz, which normally handles one-fifth of the world's oil shipments, Iran has begun targeting the infrastructure of its Mideast neighbors. Those include attacks on an oil facility in the United Arab Emirates, a thwarted drone attack on a huge Saudi oil field, and a strike on Bahrain, which was followed by a fire at its only oil refinery.
Such attacks will prolong the drag on the economy from high energy prices, economists point out, since it will take much longer to repair facilities than it would to reopen the Strait of Hormuz.
The U.S. has said it will not attack Iran鈥檚 oil infrastructure. But over the weekend, Israel hit three oil depots and a refinery in the vicinity of Tehran.
If these strikes continue, they could send oil prices spiraling even higher. High oil prices, in turn, could send the U.S. and other major economies into recession if they remain elevated long enough.
On Monday, though, market sentiment tilted toward hope by the end of trading.
鈥淲e expect the U.S. to declare victory fairly quickly and the Administration will likely focus on re-opening the Strait,鈥� David Kelly, chief global strategist at J.P. Morgan Asset Management, emailed in an analysis on Monday. 鈥淔utures markets apparently expect them to succeed, with the June [West Texas intermediate] contract on Friday trading at $82.56 [per barrel] and the December 2026 contract trading at $69.07.鈥�
The Standard & Poor鈥檚 500 stock index closed up 0.8% for the day.
