Risk-off Mood Prevails as US-Iran Conflict Pushes Oil Above $90

Global Mood: Cautiously Risk- Off
Drivers: US-Iran War Intensifies, Israel Prepares for Escalation, Kyiv Major Missile Strike

Asian markets traded mixed on Monday as investors maintained a risk-off stance amid intensifying conflict in West Asia and rising crude oil prices. South Korean equities led regional declines, while Australian shares posted modest gains and Japanese markets remained shut for a holiday. Investor sentiment remained fragile as Brent crude climbed above $90 a barrel, reflecting growing concerns over disruptions to global energy supplies through the Strait of Hormuz.

The latest round of US military strikes against Iran and Tehran's continued attacks on regional targets signalled a further deterioration in the security environment, raising fears that the conflict could broaden into a prolonged regional war. Higher oil prices reinforced concerns over renewed inflationary pressures, potentially complicating the outlook for global monetary policy. At the same time, heavy Russian missile strikes on Ukraine underscored that geopolitical risks remain elevated across multiple regions. The combination of escalating conflicts, energy supply uncertainty and inflation risks prompted investors to favour defensive positioning while closely monitoring further geopolitical developments.

THE BIG STORY
The US-Iran conflict escalated sharply on Sunday as Washington completed its eighth consecutive night of strikes on Iranian military targets after two US service members were killed and one went missing following an Iranian attack in Jordan, the first American combat deaths of the renewed hostilities. US Central Command targeted coastal surveillance and air defence facilities while Kuwait and Bahrain reported intercepting fresh Iranian attacks. In a significant signal of potential further escalation, Israel confirmed it is preparing to receive dozens of additional US aerial refuelling aircraft, a capability that would be essential for any expanded strikes on Iranian nuclear or energy infrastructure deep inside the country. With the interim ceasefire now effectively dead and both sides taking casualties, the risk of a return to full-scale war is higher than at any point since February.

Russia simultaneously delivered one of its heaviest ballistic missile barrages of the war on Kyiv overnight, firing 41 missiles across the capital and killing at least five people across Kyiv and Kharkiv. Ukraine's air force shot down fewer than half the incoming missiles, exposing the severity of its interceptor shortage as residential buildings, a supermarket, a metro station, and a rehabilitation centre were among the structures hit. Zelenskiy again implored allies for more air defence support as residents picked through rubble. The simultaneous escalation on two fronts — an intensifying air-naval war in the Gulf and a grinding missile campaign over Ukraine — underscores a global security environment deteriorating on multiple axes at once, with energy markets, inflation, and financial stability all hanging in the balance. 

Data Spotlight
US one-year inflation expectations fell for a second consecutive month to 4.2% in July, a four-month low, down from 4.6% in June, though still well above the 3.4% recorded before the Iran conflict began. Five-year expectations held steady at 3.3%, a three-month low.

The University of Michigan Consumer Sentiment Index rose to 54.4 in July, the highest since February and above expectations of 51.0, as easing gasoline prices lifted all five components broadly across income, age and political groups. Sentiment remains 12% below year-ago levels, and most responses were collected before the July 7 resumption of US strikes against Iran.

US industrial production rose 0.1% in June, matching May's pace and slightly below forecasts, as flat manufacturing output offset modest gains in mining and utilities. Q2 industrial production expanded at a solid 4.0% annualised rate.

Takeaway: Easing inflation expectations and improving consumer sentiment point to a tentative stabilisation in household confidence, though both remain well above pre-conflict levels. The resumption of US strikes against Iran poses a key near-term risk to this fragile recovery.

 

WHAT HAPPENED OVERNIGHT

US stocks fall for the day and week as AI selloff broadens into wider risk-off mood

• The Dow fell 0.77%, S&P 500 lost 1.01%, and Nasdaq dropped 1.40%, with all three indexes posting weekly losses as the chip-led selloff spread across sectors.
• The Philadelphia Semiconductor Index confirmed a bear market, closing 20.2% below its June 22 record high, and logged its steepest weekly loss in over a year, though it remains up 65% year-to-date.
• All Magnificent Seven stocks dipped except Apple, with Alphabet and Meta leading losses at 3.2% and 2.7% respectively, as active managers began scaling back AI exposure.
• Energy was the sole S&P 500 sector to gain, benefiting from spiking crude prices amid escalating West Asia hostilities.
• Q2 earnings season is off to a strong start, with 90% of the 49 S&P 500 companies reporting so far beating estimates, lifting full-season earnings growth expectations to 26% from 19.2% as of April 1.
• Consumer sentiment rose to a five-month high in July, though housing starts, building permits, and industrial output were soft.

US Treasury yields pull back from near two-month highs as soft inflation and risk-off flows support bonds

• The 10-year yield fell to 4.52% from the July 13 peak of 4.62%, as both CPI and PPI declined in June and Michigan survey inflation expectations dropped for a second month.
• Fixed-income assets drew additional support after Trump claimed China compromised US presidential elections in 2020, risking the trade truce between the two countries struck after last year's tariff exchange.
• Pro-inflationary risks lingered as commercial vessels continued to avoid the Strait of Hormuz amid renewed US-Iran strikes, keeping energy supply concerns alive.
• Rate futures show over two-thirds of the market positioned for a Fed hike by year-end, though this month's meeting is widely expected to result in a hold.

Dollar rebounds from one-month low as China trade jitters and hawkish Fed signals boost safe-haven demand

• The dollar index rose to 100.8, bouncing from the July 16 low of 100.5, diverging from the retreat in Treasury yields as investors pivoted to safer assets.
• EU-China trade disputes also dampened demand for the euro, adding to the dollar's relative appeal.
• FOMC members continued to signal a potential rate hike this year on stubborn core inflation, backed by strong retail sales and low jobless claims, prevailing over June's soft inflation prints and a second drop in Michigan inflation expectations.

Oil surges over 4% to one-month high as US-Iran strikes escalate and Red Sea closure looms

• Brent settled at $88.10/bbl, up 4.59%, and WTI at $82.49, up 4.48%, both at their highest since mid-June, with weekly gains of 16% for both benchmarks.
• The US struck bridges and an airport in Iran while Tehran hit a power and desalination plant in Kuwait and launched its first direct attack in Syria, marking a sixth straight night of US strikes on Iranian facilities.
• Strait of Hormuz flows have fallen sharply as Iran targets transiting vessels, while Iran is pressing the Houthis to close the Red Sea route if the US hits Iranian power infrastructure.
• Saudi Arabia has diverted over 70% of its daily crude exports to the Red Sea port of Yanbu via the East-West Pipeline, with Yanbu shipments averaging 4 million bpd, up from 973,000 bpd a year ago, making any Red Sea closure a critical threat.
• Qatar said its armed forces thwarted an Iranian missile attack early Friday, with a child wounded by shrapnel from interception operations.
• Analysts warned that further tanker damage could prompt shipowners to refuse entry into the Persian Gulf entirely, driving prices sharply higher.
• Ukraine struck a Russian oil refinery in the Yaroslavl region, adding further pressure on global energy supply.

Day’s Ledger* 

Economic Data

• German June PPI
• Canada June CPI
• US June Leading Index

Corporate Actions

• Earnings: Indian Overseas Bank, Jaiprakash Power Ventures, Karur Vysya Bank, Transformers and Rectifiers (India), UltraTech Cement,

Tickers to Watch

• ADITYA BIRLA CAPITAL: Makes rights issue investment of 4.845 billion rupees in equity shares of Aditya Birla Sun Life Insurance.
• ALEMBIC PHARMACEUTICALS: NATCO receives tentative USFDA approval for Olaparib tablets; Alembic to distribute the product in the US.
• CIPLA: USFDA conducts routine cGMP inspection at subsidiary InvaGen Pharmaceuticals' Central Islip, New York facility from July 13-17, 2026; company receives one Form 483 observation.
• GAIL: Signs agreement with KABIL for collaboration in critical minerals.
• JSW CEMENT: JSW Steel approves sale of shares worth up to 8.11 billion rupees in the proposed IPO.
• NATCO PHARMA: Receives tentative USFDA approval for Olaparib tablets; litigation remains ongoing.
• PIRAMAL FINANCE: Seeks approval to raise up to 40 billion rupees via QIP, rights issue or preferential placement.
• RELIANCE INFRASTRUCTURE: CBI searches registered office in connection with RCFL/RHFL transactions.
• RELIANCE POWER: CBI conducts search and seizure operations at the company's office on July 18, 2026.

Must Read

• India’s Markets Look Resilient Even as the Economy Loses its Shock Absorbers
• The Ghost of FCNR(A) Was Invited Through the Swap Window
  
• Rethinking India’s Urban Trees and Power Lines
  
• Guardians and Decoys of Hormuz
  
• Do Softer Crude and Low Core Inflation Weaken RBI MPC's Case for Rate Hikes? 

(*Compiled from various media sources)

See you tomorrow with another edition of The Morning Edge.

Have a great trading day