On Tuesday (July 21), attacks on Kuwait's power generation and desalination facilities violently pushed Brent crude oil back above $90, completely shattering any brief glimmer of hope for a ceasefire. US long-term Treasury yields jumped, the yield curve steepened sharply, and inflation fears reignited. Gold fluctuated at high levels amid the tug-of-war between safe-haven demand and a strong dollar, while the dollar passively strengthened, supported by both safe-haven demand and interest rate hikes. The conflict is spilling over from military targets to civilian infrastructure in the Gulf, amplifying the tail risk of supply disruptions.

Introduction

The flames of war in the Middle East are spreading outwards from the Strait of Hormuz. Overnight, Kuwaiti facilities were attacked, and the Houthi rebels simultaneously announced a naval blockade of Saudi Arabia, sounding alarms on both the Red Sea and the Persian Gulf, two vital energy arteries. Bond traders have systematically reduced their sensitivity to Trump's social media posts; the market is no longer pricing in verbal threats, but instead focusing on every real explosion and act of destruction. This article will analyze the latest developments from four perspectives: US Treasury bonds, foreign exchange, gold, and crude oil, highlighting the logic behind extreme sentiment and hidden risk shifts.

Crude oil: Attacks on civilian infrastructure cause risk premiums to swell sharply.

Iran's strikes on Kuwaiti power and water treatment plants are seen by the market as a key signal of a serious escalation of the conflict. According to well-known foreign media reports, Brent crude oil prices surged 1.38% from a low of $87.87 to $90.43, completely erasing earlier losses caused by rumors of mediation. The narrative of supply disruptions is no longer limited to tanker attacks in the Strait of Hormuz, but has spread to the core civilian infrastructure of neighboring oil-producing countries. The Houthi threat to blockade the Bab el-Mandeb Strait further tightens Saudi Arabia's alternative route for exporting oil via the Red Sea. Traders have begun to actively price in the extreme scenario of "both straits being blocked simultaneously." Under this emotional structure, oil prices become sluggish in response to negative news, but unusually sensitive to any new physical attacks, and stop-loss orders can easily trigger impulsive price movements.

US Treasury bonds: Ignore the tweets, focus on the real gunfire.

Research from major overseas institutions reveals a significant shift: the impact of Trump's social media posts about the Middle East conflict on US Treasury yields has been steadily diminishing over time, with the market efficiently categorizing them as noise. However, this does not equate to a more relaxed sentiment in the bond market. Soaring oil prices directly reignited inflation expectations, causing US Treasuries to quickly erase overnight gains. The 10-year yield rebounded to 4.606%, and the spread between 2-year and 10-year yields widened to 39.5 basis points, with the yield curve steepening at a noticeable acceleration. Behind this lies the market's repricing of the risk of energy cost transmission to core inflation, and the possibility that the Federal Reserve may be forced to maintain tightening or even restart interest rate hikes. Compared to the verbal battles on social media, traders are more closely monitoring the actual damage reports from power plants, desalination plants, and oil tankers—these are the core variables reshaping interest rate expectations.

Gold: Safe-haven appeal eroded by a strong dollar and hawkish expectations.

Geopolitical turmoil has failed to propel gold into a sustained bull market, with prices fluctuating wildly above $4,000. While Iran's attacks on civilian infrastructure should have strongly catalyzed safe-haven buying, concerns about oil price-driven inflation are pushing up the dollar and supporting higher long-term real interest rates, significantly offsetting gold's appeal. The current market exhibits a classic tug-of-war between "war premium" and "hawkish central bank expectations." Trader sentiment is highly divided: one side bets that the unchecked escalation of the conflict will trigger panic buying, while the other believes that the persistently high-interest-rate environment will continue to suppress non-interest-bearing assets. This keeps gold volatility high and significantly increases the difficulty of directional positioning.

US Dollar: Dual Status Supports Passive Strengthening

The US dollar is simultaneously playing the dual roles of a safe-haven asset and an inflation hedge. The spillover effects of the US-Iran conflict have fueled global risk aversion, leading to a habitual inflow of funds into the dollar. Meanwhile, rising energy prices have reinforced market speculation that the Federal Reserve will maintain a tight stance, providing additional support for the dollar's interest rate advantage and keeping it moderately strong against most currencies. However, this logic has a vulnerability—if the conflict continues to significantly drive up domestic gasoline prices in the US and erode consumer spending power, the dollar's safe-haven premium may give way to concerns about stagflation damage. Currently, external turmoil has temporarily granted the dollar a passive strength, but its resilience is highly dependent on whether subsequent economic data indicates a deterioration in endogenous growth momentum.

Trend Outlook

In the short term, oil prices will remain highly sensitive and asymmetric to geopolitical news. Any further attacks on civilian infrastructure could push Brent crude to higher levels, while ceasefire rumors will only trigger a brief sharp drop, with bullish sentiment dominating. Long-term US Treasury yields still face upward risks, and the steepening yield curve is expected to continue. Gold is anticipated to continue its two-way high volatility, with safe-haven impulses and interest rate suppression alternating in short-term movements, making a stable trend unlikely. The US dollar is likely to maintain a relatively strong consolidation, but discussions about the risk of stagflation in the US will limit its upward slope. In the long term, if the conflict continues to erode global supply chains and push up inflation, the stagflation narrative will replace simple supply concerns, posing a challenge to equity-bond portfolios, while the relative value of physical assets and cash-like instruments may increase. Key observation windows lie in the actual traffic volume in the Strait of Hormuz and the Bab el-Mandeb Strait, and whether diplomatic channels can produce credible buffer solutions. The tail risk lies in miscalculation triggering a wider regional conflict, which is unlikely but, if it occurs, will drastically rewrite all asset prices.

Frequently Asked Questions

Why are bond traders ignoring Trump's posts? Research from major overseas institutions shows that as the conflict continues, the short-term impact of these social media posts has significantly diminished, and the market has come to define them as emotional noise. Traders are now adjusting their interest rate expectations based on verifiable physical damage and actual supply disruptions; verbal threats are no longer able to sustainably sway yields. What does the attack on the Kuwaiti power plant mean? The conflict is spilling over from military targets to civilian infrastructure in Gulf Cooperation Council member states, indicating a sharp increase in the risk of escalation. This not only directly threatens Kuwait's electricity and freshwater supplies but also forces the oil market to price in more unexpected supply disruptions. How serious is the Houthi threat of a maritime blockade? The Houthis have claimed to block the Bab el-Mandeb Strait, creating a pincer movement with Iran's control of the Strait of Hormuz. If both key channels are severely blocked simultaneously, about one-third of global seaborne oil trade will face disruption, and the market is currently far from fully pricing in this tail scenario. Is the US dollar safe now? In the short term, it is passively stronger due to safe-haven demand and expectations of interest rate hikes, but if soaring energy prices severely impact US domestic consumption and reinforce stagflation concerns, the dollar's safe-haven attributes may weaken. Traders need to be wary of the subtle shift from a "strong dollar" narrative to a "stagflation damage" logic. Why hasn't gold surged with the war? Gold is caught in a two-pronged attack between geopolitical safe-haven demand and hawkish central bank expectations. War and inflation are long-term positives for gold prices, but rising interest rates and a strong dollar continue to suppress its upward momentum. In the current situation, gold is more likely to maintain a high level of volatile fluctuations rather than embark on a one-sided bull market.