Markets started the week under strong tension, digesting three simultaneous developments: Kevin Warsh's speech in Jackson Hole on inflation control, the announcement of a petroleum agreement between the US and Venezuela, and a new military escalation in the Strait of Hormuz. The latter factor emerged on Sunday and reinforced the geopolitical risk premium in a region that is the main chokepoint for world oil.
US forces struck Iranian rocket launchers on Larak Island, near the Strait of Hormuz, in an operation that represents the first direct US military action in the region in about a month. Washington claims that the Islamic Revolutionary Guard Corps was preparing to launch rockets with naval mines into the strait. Iran confirmed deaths and injuries among its fighters and promised "punishment of the aggressor," with news agencies reporting at least two deaths and two injured.
The war between the US and Iran completed six months on Friday, having begun on February 28 with "Operation Epic Fury." So far, Washington has failed to eliminate the Iranian nuclear program or provoke a regime change in Tehran, and the conflict continues to generate a global energy crisis, pressure on the cost of living, and instability in the Middle East. WTI oil was trading near $83 and Brent around $89 on Friday, but Sunday's events should push prices higher, especially if there is Iranian retaliation or a new partial blockade of traffic through the strait.
Meanwhile, President Donald Trump announced on social media a purported petroleum agreement with Venezuela that, according to him, will give the US majority control over more than 65 billion barrels of proven Venezuelan reserves. The immediate impact of this agreement may be limited, given that there are many unknowns regarding production timelines, legal structure, and operations. Regarding the Federal Reserve, Warsh's speech raised fears of a potential rate hike, leading Wall Street to close lower on Friday, with the Dow Jones losing 0.02%, the S&P 500 falling 0.25%, and the Nasdaq retreating 0.52%.
