On Wednesday (July 8), renewed fighting in the Middle East and internal power struggles within the Federal Reserve are pushing markets into overheated mode. Trump's announcement of the collapse of the temporary ceasefire with Iran, attacks on oil tankers in the Strait of Hormuz, and a surge in oil prices exceeding 5% all contributed to the market's surge. US Treasuries experienced a sharp sell-off, with the 10-year yield climbing to 4.58%, putting pressure on the stock market. Markets are holding their breath awaiting the release of the Fed's June meeting minutes tonight, hoping to glean insights into the depth of the interest rate hike disagreements within the hawkish camp under new Chairman Warsh.



Three forces are reshaping global asset pricing: the expectation vacuum following the Federal Reserve's proactive removal of forward guidance "road signs," the substantial physical threats to Middle Eastern energy arteries, and the siphon effect of Japanese capital's quiet return on the US Treasury market.

The Federal Reserve deliberately created a "black box": suspicion continues to fester.

With the June meeting statement cutting all forward guidance, tonight's minutes become the only window into the situation. However, new Chairman Warsh may deliberately downplay the details to avoid providing any "roadmap" again. This information vacuum is itself a hawkish signal, suggesting that the internal divisions within the committee regarding the path of interest rate hikes are too deep to be bridged with milder language.
Scenario: If the minutes reveal that a "majority" of committee members favor a rate hike this year due to persistent inflation, the market's priced-in probability of a rate hike will jump rapidly, providing short-term support for the US dollar and putting pressure on interest rate-sensitive assets. If the minutes deliberately downplay the differences and emphasize reliance on data, it may soothe sentiment in the short term, but the period of uncertainty before the September meeting will be prolonged, making it difficult for volatility to truly decline.

The Strait of Hormuz: Energy Supply Disruptions Go From Tail Risk to Reality

A Qatari LNG carrier was hit near the entrance to the Strait of Hormuz, its engine room catching fire and posing a risk of explosion. Several oil tankers were forced to turn back. The US military raised the threat level to "serious" and launched airstrikes. Daily traffic in the strait has plummeted from over a hundred vessels before the conflict to single digits. This is no longer distant geopolitical news, but an ongoing disruption to the global energy supply chain.
Scenario Assumption: Current oil prices already reflect the premium for a ceasefire breakdown. If subsequent conflict directly impacts Iran's core energy facilities, mainstream institutions estimate that crude oil could quickly break through psychological barriers, leaping towards the mid-$80 range or even higher, substantially exacerbating global inflationary pressures. If emergency diplomatic intervention leads to a new interim agreement, the premium may be partially reversed, but given the collapse of mutual trust, this scenario is unlikely in the short term.

Japan's "return move": Capital repatriation quietly pushes up global interest rates.

The Bank of Japan's hesitation in normalizing its monetary policy has led to a surge in the yield on 10-year Japanese government bonds to a 30-year high. Major Japanese life insurers and pension funds have announced plans to increase their holdings of domestic bonds. This suggests that Japanese funds, which have been flowing into US Treasuries for years, are now turning back.
This structural inflow will systematically push up the term premium of global bonds. Even if risk aversion intensifies, US Treasury yields may not decline smoothly—the absence of Japanese buyers coupled with inflation fears is reshaping the traditional volatility paradigm of the interest rate market.

Inflationary psychological de-anchoring: a dangerous cycle of self-fulfillment

A New York Fed survey shows that consumer inflation expectations have risen to a new high. Core PCE has climbed to 3.5% and is still rising, indicating that core inflation was already out of its comfort zone before the war. Now, with the impact of oil price shocks and the lingering effects of tariff rhetoric, people are beginning to believe that high prices will become the norm. Once this expectation solidifies, the Fed will be forced to break this belief with more aggressive interest rate hikes, and the window for a soft landing will narrow rapidly.

Trend Outlook

In the short term, the simultaneous decline in both stocks and bonds may continue. If the meeting minutes reveal hawkish disagreements, it will amplify panic regarding interest rates; the aftermath of the tanker attacks will directly determine the depth and breadth of risk aversion before the weekend. The long-term logic is even more severe: the probability of the Federal Reserve being forced to raise interest rates this year is significantly increasing, coupled with high energy costs and the repatriation of Japanese capital, global risk assets face a protracted battle of tightening financing conditions. The market is shifting from a "bad news is good news" reliance on easing to a difficult phase of repricing actual supply and demand and geopolitical factors.

Frequently Asked Questions

Q: Why did the Fed's removal of forward guidance have such a significant impact?
A: Forward guidance used to be a tool to reassure the market. Actively removing it is tantamount to telling the market that the future path is extremely uncertain and that internal consensus has collapsed. This in itself transmits risk, rather than controls it.

Q: Will oil prices continue to spiral out of control after the tanker attacks?
A: The key factor is the actual navigability of the Strait of Hormuz. If shipping volumes remain low, the supply gap will be difficult to fill in the short term, and oil prices will likely maintain a risk premium. Another ship damage incident could trigger a chain reaction of panic pricing.

Q: Why did US Treasury yields surge despite the risk aversion sentiment?
A: The core issue in this round is not economic recession, but rather inflation eroding purchasing power. Investors are demanding higher term premiums to compensate for risk, while Japanese institutions are repatriating funds, reducing overseas buying. These multiple factors have collectively pushed up yields.

Q: How did the Fed's style differ under Warsh's leadership?
A: He is focusing more singularly on controlling inflation and mentioning employment targets very little. This may lead to a steeper decision-making response function, less tolerance for data, and the market needs to adapt to this more hawkish underlying logic.

Q: How should investors interpret the situation now?
A: Focus on the risk transmission chain rather than a single asset. Rising oil prices are putting downward pressure on the bond market through inflation expectations, while high yields are squeezing stock valuations. We should emphasize the defensive nature of assets, closely monitor subtle changes in the Hormuz situation and the Fed's statements, and manage leverage effectively.