Geopolitical Risk Repriced: Oil, Bonds, and U.S. Dollar React to Hormuz Disruptions as Iran-U.S. “Deal” Disintegrates

By the Curmudgeon with Victor Sperandeo

Introduction:

As we predicted, Trump’s "39th Iran peace deal," collapsed last week with multiple air strikes by each side (see cartoon below). The MOU, overseen by Vice President JD Vance, was effectively abandoned after the U.S. and Iran traded retaliatory attacks, including strikes on commercial vessels in the Strait of Hormuz. President Trump has since declared the deal “over,” while Iranian officials have pointed to U.S. sanctions and military actions as decisive breaches of the agreement.

Oil markets ended the week in a narrow range, masking a sharp rise in geopolitical risk tied to renewed tensions in the Persian Gulf. While Brent crude stabilized near $76 per barrel—up roughly 5% from pre-conflict levels but well below the ∼$120 peak during active Iran-U.S. hostilities—the underlying disruption to shipping through the Strait of Hormuz is emerging as the more consequential signal for financial markets.

Traffic through the Strait (see chart below), which carries roughly 20% of global oil supply, has dropped sharply, with just 22 vessels transiting on Thursday versus more than 130 per day pre-conflict. This supply-chain friction, compounded by Iran’s assertion of transit control, introduces a persistent geopolitical risk premium into energy markets even as spot prices remain contained. The divergence between stable oil prices and deteriorating logistics suggests latent upside volatility in crude oil, particularly if disruptions broaden or insurance and freight costs escalate further. Underscoring that dynamic is that U.S. oil supply is dangerously low. The Strategic Petroleum Reserve is at the lowest level since 1983!

Cross-Asset Market Implications:

Equities (risk resilience vs. fragility)
Global equities have shown surprising resilience, with Asian markets gaining over 1% and the S&P 500 advancing modestly. However, this strength appears increasingly bifurcated:

· AI-driven capex optimism continues to anchor U.S. large-cap performance.

· Energy-sensitive sectors (transport, chemicals, consumer discretionary) face margin pressure from sustained fuel costs.

· Defensive stock sector ETF's (consumer staples, utilities, health care, energy, etc.) were all down last week.

· A renewed oil shock could challenge current equity valuations, particularly if it feeds into inflation expectations.

U.S. Fixed Income Markets:

U.S. Treasury note and bond yields remain elevated, with the 10-year hovering a bit above 4.5%. We believe that’s due to:

· Market concern that higher energy prices could delay Federal Reserve easing.

· A potential shift toward “higher-for-longer” Fed Funds rate expectations if oil stabilizes above pre-conflict levels.

· Early signs of term premium rebuilding, consistent with geopolitical uncertainty rather than pure growth dynamics.

Oil and Gold:

Surprisingly, Oil and Gold prices did not rise significantly this past week as Iran-U.S. hostilities resumed:

· Oil is trading well below Iran war crisis highs despite severe physical disruptions, implying markets are pricing in a contained conflict scenario. Please see Victor's Energy comments below.

· Have current oil prices embedded the disruption risk premium? Markets had been anticipating renewed U.S.–Iran hostilities and possible Hormuz disruptions for months, so the “deal collapsing” and subsequent strikes were partially priced in. When events align with expectations rather than surprise markets, you often see muted moves despite the headline intensity.

· Even if Iran has asserted dominance and shipping traffic has collapsed, the strait has not been completely shut. Some vessels have moved through the Strait under heavy insurance and military escort, and alternative routes (though costly and slower) remain technically open. absent a hard, sustained closure with major tanker losses or prolonged blockage, the market treats this as elevated risk rather than an immediate supply catastrophe.

· The International Energy Agency (IEA) and energy analysts have signaled that global oil demand could fall in 2026, which acts as a counterweight to the Hormuz risk premium. At the same time, OPEC+ has been moving to increase output, and some producers have been willing to step in to stabilize markets. This combination keeps Brent from breaking convincingly above previous peaks despite the geopolitical backdrop.

· Gold is being weighed down by a resilient U.S. dollar and rising Treasury yields. Higher real yields and a strong dollar make gold (a non-yielding asset) less attractive, offsetting its traditional safe-haven appeal.

· Gold is often a geopolitical chaos hedge, so the yellow metal might have renewed “safe haven” inflows if Iran-U.S. tensions escalate. Please see Victor's Precious Metals comments below.

U.S. Dollar:

The U.S. dollar faces two reinforcing dynamics:

· Safe-haven demand tied to geopolitical instability.

· Yield support from elevated Treasury notes and bond rates.

· This combination tends to pressure emerging market currencies and tighten global financial conditions, especially for energy-importing economies.

Inflation and Consumer Spillover:

Gasoline prices in the U.S. have risen to $3.88 per gallon (over $5 per gallon in California), about 30% above pre-conflict levels, reinforcing sticky inflation dynamics. With refining capacity constrained and inventories low, retail fuel prices are likely to remain elevated even if crude stabilizes. This asymmetry—where rising energy prices transmit more quickly than declines—strengthens the case for persistent headline inflation, complicating central bank policy paths.

Oil Demand vs Supply Risk:

The IEA’s projection of a 111 million barrel per day decline in global demand in 2026 introduces a countervailing force. However, near-term market pricing suggests that geopolitical supply risk is currently outweighing cyclical demand weakness. For investors, this creates a regime where:

· Oil volatility is driven more by logistics and geopolitics than macro demand.

· Inflation expectations remain sensitive to energy shocks.

· Cross-asset correlations (oil–yields–US $) are tightening again after a period of decoupling.

Market Psychology -- “Risk On” vs. “Risk Off” Competition:

The geopolitical shock from resumption of the U.S.-Iran war is competing with a broader “risk-on” narrative rather than dominating it cleanly.

In recent weeks, investor sentiment has been influenced by strong AI-related optimism and upbeat corporate earnings, which supports risk assets and reduces the urgency to flee into traditional hedges.

Yet another example of AI build-out mania and a Risk ON rush for companies to be more competitive:

This Friday, the NY Times reported, “Through the end of June, there were about $3.2 trillion in global deals, a 45% jump from a year earlier, according to Dealogic, a data provider. That was the most spent on deal-making over a half-year period in at least a decade."

So, while the headline news seems severe—peace deal over, renewed strikes, Hormuz effectively under Iran’s control—the financial markets are reacting to a mix of already-priced in risks, demand concerns, and a strong yield/dollar environment that is keeping both oil and gold more constrained than the crisis narrative might suggest.

Victor on the U.S. Economy:

Disclaimer: I am a 100% “Contrarian” to the U.S. Government, the Fed, Mainstream Media, and Wall Street narratives. Their stories on the economy are NOT reality, but political ruses to promote their agendas. The goals and reasons are always the same: Power and Money.

……………………………………………………………………………………

Kevin Hassett current Chairman of the Council of Economic Advisors for the Trump administration says GDP will be between +3.0 to 4.0 %” in 2026. In sharp contrast, my conservative guess is -2.0%!

HSBC (UK) Economist Steve Keen says “GDP will be-10.0% -- effectively a depression! He is a major critic of Neo-Classical economics.

Here's a reasoned in depth “Bearish Economic Perspective" video interview with Jim Paulsen [https://www.youtube.com/watch?v=xJilSCHhzCs] -- a 40-year prominent economist and former Chief Investment Strategist. He sees a stock market correction coming soon. (Note: I have read and listened to Paulsen for the last 25 years. He is a very modest low-key economist that has always been non-biased.)

As a result, I believe the U.S. will be in recession with a bear market in stocks by the end of 2026. My confirmation of that will be when Goldman Sachs (GS) breaks below $780, and U.S. bond ETFs: LQD <=105, HYG <=77, and JNK <=93!

Europe is now a socialist nation, and their leaders are causing an economic decline which their citizens will long remember. That will adversely affect the U.S. economy. There is no real democracy in the EU as committees appoint the leaders who remain in office.

Victor on the Energy Markets:

Astonishingly, the price of Crude Oil is only +4.02% from its recent reclosing low on July 6th.

àThe oil price is being manipulated down by the U.S. government selling futures contracts and releasing oil from the Strategic Petroleum Reserve (SPR), which is at a 43-year low as noted above by the Curmudgeon.

However, the price of Heating Oil is +14.23% from its closing low on June 26^th. That’s because there are no SPR reserves for Heating Oil. Part of the price difference is also due to the increase in the Crack Spread (the difference between the price of crude oil and the refined petroleum products extracted from it, such as gasoline and diesel).

Victor - CRITICAL NEWS for the Precious Metals!

On July 24th, China will end the Shanghai Exchange's ability to SHORT (paper) metals futures contracts. This will lead to huge changes in the way precious metals are priced.

This means in China, a trader CANNOT short gold or silver futures without the ability to deliver the physical metal (s). No naked shorting will be permitted to depress the price.

The COMEX and LBMA will have to follow this or lose all its metals to China as prices will be much higher in China and that will lead to arbitrage.

China's new rule suggests a potential BOTTOM for the precious metals. It depends how the U.S exchanges respond?

The current Shanghai Silver price is $66.8/oz., which is 11.9% above the U.S. July futures Silver price of 59.71 (it settled a little higher at $59.84).

My estimate is +15 to 20% higher prices for GOLD AND SILVER in China. For now, do NOT be short these metals. I suggest a 5% to 10% long those precious metals. I have been long as an investment (not a trade) since 1994.

News Flash:

Lindsey Graham (R-SC) - one of the most experienced members of the Senate - died suddenly on Saturday night. South Carolina governor Henry McMaster will appoint someone to serve out Graham's term, which expires on January 3, 2027.

As of July 13th, there are 113 days till the U.S. mid-term elections where Senator Graham was seeking his 5th term. The election outcome will determine if the GOP will retain their majority power in the Senate. The GOP majority House of Representatives is already considered to be lost to the Democratic party!

End Quote to Remember:

"When prices move without a reason, up or down significantly, and where it looks completely illogical, the odds are its manipulation!" by Anonymous.

-->This anonymous quote perfectly captures the frustration investors feel when confronted with the "irrational" volatility often seen in today's markets.

.................................................................................

Wishing you good health, success and good luck. Till next time........

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

Readers are PROHIBITED from duplicating, copying, or reproducing article(s) written by The Curmudgeon and Victor Sperandeo without providing the URL of the original posted article(s).