Daily Market Review

Closing Recap

Wall Street succumbed to “Stagflation Sickness” on Thursday, as the toxic combination of soaring oil prices, rising yields, and deteriorating sentiment finally broke the market’s resilience. The Dow Jones plunged over 700 points (1.56%), while the Nasdaq tumbled nearly 1.8% as the reality of a protracted Middle East conflict set in. WTI Crude exploded nearly 10% higher to approach $96 a barrel after Iran’s Supreme Leader doubled down on closing the Strait of Hormuz, rendering the IEA’s historic reserve release entirely impotent. The bond market reacted violently, with the 10-year Treasury yield blowing past 4.25% as traders completely priced out any Fed rate cuts for 2026. In a sign of total dysfunction, the US Dollar acts as a wrecking ball against the Euro and Yen, while Gold fell over 1% as funds liquidated paper assets to meet surging margin requirements in the energy pits.Precious metals gave back some gains as the stronger dollar weighed on prices, but Bitcoin showed signs of stabilization.

Key Takeaways

• Stocks Slide on Middle East Escalation: Major indices fell sharply as the ongoing Middle East conflict pushed oil prices higher, stoking fears of a prolonged inflationary shock. The S&P 500 dropped 1.52%, and the Russell 2000 was crushed (-2.12%). Breadth was awful (4:1 decliners), with only Energy and Utilities catching a bid.
• Oil Nears $100 on Hormuz Closure: WTI Crude spiked nearly 10% to $95.73, and Brent reclaimed $100. Iran’s Supreme Leader stated the Strait of Hormuz should remain closed, and reports indicate half of all global LNG carriers are trapped in the Gulf.
• Fed Rate Cut Hopes Fade Rapidly: The bond market has broken. The 10-Year yield hit 4.25% (up 25bps in a few days). Traders no longer expect a Fed rate cut in 2026; instead, the debate has shifted to rate hikes in Europe and the UK to combat energy inflation.
• Hedge Fund Short Squeeze Risk: Hedge fund short exposure to US macro products hit 11%, the highest since the 2022 bear market. Any positive headline (like a sudden ceasefire) could trigger a face-ripping short-covering rally of 2-3%.
• Goldman Warns of Deep Cuts if Oil Stays High: Goldman Sachs revised its economic outlook, predicting higher inflation and lower growth if the oil shock persists, and warning that the Fed may need to delay cuts or even hike rates.
• Precious Metals Pull Back on Stronger Dollar: Gold and silver prices fell under pressure from a surging U.S. dollar and rising Treasury yields, though safe-haven demand remains underlying.
• Yen Intervention “Red Alert” (159.50): USD/JPY is creeping toward the 160.00 “danger zone.” Japan’s Finance Minister warned that high oil prices are damaging the economy and signaled readiness to intervene in FX markets.
• Pound Hit by Weak UK Data: GBP/USD slipped below 1.3300 as a disappointing UK GDP report highlighted the vulnerability of the UK economy to stagflation risks.
• Euro Parity Watch: Danske Bank shifted its EUR/USD target to 1.1200, citing the catastrophic terms-of-trade shock hitting Europe. The Euro is currently struggling to hold 1.1500.
• RBA Rate Hike Bets Increase: Following hawkish comments from the RBA, major banks now expect a rate hike in March, supporting the Australian dollar.
• “Trump Put” Tested as President Demands Rate Cut: President Trump publicly criticized Fed Chair Powell, demanding an immediate rate cut, adding political pressure to an already complex monetary policy landscape.

Market Overview

The market has officially capitulated to the “Oil Shock” narrative. Thursday’s session confirmed that the market is now entirely hostage to the escalating conflict in the Middle East. Any initial optimism surrounding the “soft landing” narrative has been obliterated by the reality of surging energy prices. Despite a relatively tame inflation report earlier in the week, the market is aggressively pricing in the inflationary impact of crude oil marching towards $100 a barrel. This has caused a swift and brutal repricing of Federal Reserve expectations; the market has gone from anticipating multiple rate cuts this year to questioning whether the Fed will cut at all, with some analysts even whispering about the possibility of rate hikes. We are witnessing a classic “Correlation 1” liquidation. When oil jumps 10% in a day, risk models force systematic selling across equities and bonds. The fact that Gold fell 1% while the world burns is the ultimate “tell” – this is a liquidity event where traders are selling what they can to cover energy margin calls.

Index	Up/Down	%	Last
DJ Industrials	-739.66	-1.56%	46,677
S&P 500	-103.24	-1.52%	6,672
Nasdaq	-404.16	-1.78%	22,311
Russell 2000	-53.88	-2.12%	2,489

This toxic combination of rising inflation expectations and a less accommodative Fed is a nightmare scenario for equities. The selling pressure was broad and relentless, pushing the S&P 500 below key technical levels and sending the VIX fear index surging. The extent of the bearishness is underscored by Goldman Sachs’ revelation that hedge fund short positioning is at its highest level since the 2022 bear market. This extreme positioning creates a fragile market dynamic; while the path of least resistance currently appears lower, any positive news – such as a sudden de-escalation in the Middle East – could trigger a violent short squeeze. For now, however, the market remains firmly in the grip of fear, with the focus shifting to Friday’s crucial PCE inflation data, which may already be viewed as obsolete given the recent oil shock.

Economic Calendar

With the geopolitical situation dominating, economic data is largely being ignored as it reflects pre-war conditions. Today is PCE Day (the Fed’s preferred inflation gauge), but the data is from January (pre-war) and will likely be ignored by the bond market, which is entirely focused on current oil prices.

Data Released Yesterday / Overnight:

• U.S. Weekly Jobless Claims: Fell to 213,000, slightly better than expected, showing labor market resilience.
• U.S. Housing Starts (Jan): Rose a strong +7.2% m/m, though building permits fell.
• U.S. Trade Balance (Jan): The deficit narrowed significantly to $54.5 billion.
• UK Monthly GDP (Jan): Stagnated at +0.0% m/m, missing the +0.2% forecast and highlighting economic weakness.
• NZ Manufacturing PMI: 55.0 (Strong expansion).

Today’s Economic Calendar:

• European Session: No major data releases.
• U.S. Session: The main highlight is the U.S. January PCE Price Index, the Fed’s preferred inflation gauge. However, its impact will likely be muted given the recent oil spike.
• 13:30 GMT (8:30 ET) – US PCE Price Index (Jan). Headline Est: 2.9% YoY. Core Est: 3.1% YoY.
• 13:30 GMT – Canada Employment Report. Est: +10k.
• 15:00 GMT – Univ. of Michigan Consumer Sentiment. Expect a sharp drop due to gas prices at the pump.

Asset Class Spotlight: FX, Commodities, Bonds & Crypto

The energy market remains the epicenter of the crisis. Pure chaos. Crude oil exploded higher again, with WTI surging nearly 10% to settle near $96 a barrel as Iran’s Supreme Leader stated the Strait of Hormuz should remain closed, completely offsetting news of a massive 172-million-barrel SPR release by the U.S. The CME warned that US intervention in oil futures (price controls) would be a “biblical disaster.” Precious metals were crushed by the surging U.S. dollar and rising yields. Gold fell $53 (-1.03%) to $5,125 as the Dollar and yields crushed zero-yielding assets. Silver slipped to $85.11.

Asset	Up/Down	Unit / % Change	Last
WTI Crude	8.48	9.72%	95.73
Gold	-53.30	-1.03%	5,125.80
Silver	-0.42	-0.49%	85.11
EUR/USD	-0.0050	-0.43%	1.1515
USD/JPY	0.43	0.27%	159.38
10-Year Note Yield	0.045	1.07%	4.253%

The U.S. dollar is surging on safe-haven flows and the realization that the Fed may have to delay or abandon rate cuts, putting intense pressure on its global peers.

• EUR/USD: The pair is in freefall, breaking below the 1.1450 level. The Eurozone is highly vulnerable to the energy shock, raising fears of stagflation and crushing the single currency. Options Expiry: A $866M expiry at 1.1500 will act as a battleground today; a break below opens the abyss.
• GBP/USD: The pound has also been hammered, falling towards 1.3300 as weak UK GDP data compounds the stagflation fears facing the region. Zero growth + spiking energy prices = a nightmare for the BoE. The market is now pricing a 50% chance the BoE hikes rates this year to defend the currency.
• USD/JPY: The pair is rallying towards the critical 160.00 level. The yen is under intense pressure as the BoJ is expected to delay its planned rate hikes, undermining its safe-haven appeal despite increasingly urgent intervention warnings from Tokyo. Japan is releasing 80 million barrels from its strategic reserves to fight the oil shock, but the Yen is dying under the weight of a 4.25% US 10-year yield. The Ministry of Finance is on high alert.
• AUD/USD: Hawkish Support. The Aussie is relatively stable. A Reuters poll shows economists heavily favor an RBA rate hike next week (to 4.10%) to combat inflation, which is acting as a floor for the currency.

Cryptocurrencies: Bitcoin is showing surprising resilience, rising to near $71,000 as news of U.S. regulatory progress offset the geopolitical jitters that are hammering equities. U.S. Treasury yields are climbing sharply, with the 10-year yield surging over 4 basis points to 4.253%, as the bond market aggressively prices in a resurgence of inflation driven by the oil shock and a poorly received 20-year bond auction highlights fiscal concerns.

Looking Ahead

Today is Friday the 13th, and the market is appropriately terrified of holding risk over the weekend. The market is entirely hostage to headlines from the Middle East. The primary focus will be on the status of the Strait of Hormuz and any potential diplomatic off-ramps. While the U.S. PCE inflation data is due today, it is highly unlikely to matter in the face of a major regional war and the current energy shock. Traders must brace for extreme volatility and unpredictable price swings, keeping a close eye on the highly stretched short positioning in the market, which could fuel a massive, albeit potentially short-lived, relief rally if any good news emerges.

What to Watch Today

• The “Weekend Fear” Liquidation: No one wants to be long equities or short oil going into a weekend where missiles are flying. Watch for a sharp sell-off in the final two hours of trading.
• Trump vs. The Fed: Trump’s demand for an immediate rate cut puts Powell in a brutal spot. If Powell capitulates next week, the Dollar will crash. If he holds, Trump’s fury will escalate.
• USD/JPY @ 160.00: This is the Bank of Japan’s historic “line in the sand.” If it breaks, expect a violent, unannounced FX intervention that will spike volatility across all asset classes.
• Michigan Consumer Sentiment (10:00 ET): Watch the 1-year inflation expectations component. If consumers are panicking over gas prices, it cements the stagflation narrative.