Bonds and stocks slid on Monday, oil jumped, and precious metals faced a sell-off again after US President Donald Trump rejected Iran's latest proposal to reopen the Strait of Hormuz. Brent rose about 3% to $107.50/bbl, and the dollar strengthened against most major currencies. As recently as Friday, the market hoped that bilateral talks would near a deal, but Monday proved otherwise. The MSCI Asia Pacific fell 0.8%, and the mainland China gauge touched a one-year low. S&P 500 futures dropped 0.4%, and Europe prepared for a muted open.
Although Tehran did not soften its terms — still proposing a seven-day window to reopen the strait — Trump said in a Sunday interview that the conditions might have been acceptable about a year ago, "but not now." He also indicated he expects talks to resume this week.
In effect, Trump rejected the offer while holding the door open to further discussion. That pause benefits Iran, which retains leverage, and hurts energy importers, for whom each week without clarity means higher energy costs.
Higher energy feeds inflation, and inflation pressures the Fed. The two-year Treasury yield, which is especially sensitive to rate expectations, rose six basis points to 4.91% after recently having briefly returned to 5%. Ten-year yields rose five basis points, erasing Friday's decline that was driven by hope for a deal with Iran. Markets now fully price in at least one more 25-bp hike by year-end. This month, the Fed has already implemented its first rate increase since 2023.
Why is gold falling if the Middle East situation remains tense? Because the rate channel is dominating the fear channel. Gold dropped about 2.4% to roughly $4,180/oz, and silver fell about 4%. Both metals are non-yielding, and the higher government yields make holding them more costly. The chain is familiar: oil pushes inflation higher, inflation lifts rates, and precious metals lose support. Notably, even geopolitical risk failed to keep them bid.
As the conflict continues, markets will live with the expectation of higher inflation and pricier money. However, the US economy appears resilient enough to withstand further rate hikes without slipping into a recession. Treasury Secretary Scott Bessent recently said that policymakers should keep an open mind on rates because AI-driven productivity gains and deregulation could dampen inflation — a view markets have yet to embrace.
On the FX front, traders will focus on speeches from ECB President Christine Lagarde and Bank of England Deputy Governor Sir David Ramsden. I believe hawkish rhetoric from Lagarde could provide only limited support to the euro, while a dovish tone from Ramsden will leave the British pound without backing.
Technically, the S&P 500 chart indicates that the immediate task for buyers is to overcome the resistance level of $7,718. That would signal renewed upside and open the way to $7,737. Holding above $7,756 would strengthen the bulls' case. On the downside, buyers must defend $7,698. A break below that level would likely push the index back to $7,679 and open the path to $7,656.