Iran – All about Hormuz
The second week of the conflict reinforced the view that the war may last longer than initially expected. The Iranian regime has appointed Mojtaba Khamenei, son of Ali Khamenei, as the new Supreme Leader. The appointment signals clear continuity within the regime and suggests a more hardline posture, pointing to a less transactional approach to negotiations, even though President Trump has publicly stated he does not favour him. Military activity has stabilized at levels consistent with a prolonged conflict scenario. The number of missiles and drones launched toward Israel and Gulf countries has remained broadly steady. Gulf countries are increasingly being targeted by drones and currently lack sufficient defensive capabilities to sustain protection in the event of a long conflict.
For markets, however, the situation is ultimately all about the Strait of Hormuz, which remains the regime’s most powerful strategic lever. At the moment, almost no oil tankers are transiting the strait, as Iran is using its geographical control over the passage to exert pressure on the United States and its regional allies.
In response, the International Energy Agency authorised the release of roughly 400 million barrels from strategic reserves, helping to smooth the initial market reaction in oil prices.
This dynamic is particularly sensitive for the US administration, as President Trump cannot afford sustained high oil prices with the midterm elections approaching. Communication from the White House has been inconsistent, with shifting narratives regarding both the expected duration of the conflict and acceptable oil price levels. With flows through Hormuz severely disrupted, oil prices are likely to remain under upward pressure. The current inversion in the oil futures curve suggests that markets are still pricing the disruption as temporary.
Iran – Oil shock drives global rates
Last week markets were dominated by developments around Iran and oil prices. On Monday, oil briefly surged close to $120 per barrel, while European rates gapped roughly 10 basis points higher. Even larger moves were seen in energy-sensitive regions such as Central and Eastern Europe. However, the move reversed sharply intraday as President Trump suggested that the war could be nearing an end. Oil prices fell almost 30% from their intraday highs, and European rates retraced the earlier selloff, eventually closing lower. The largest adjustment occurred in rates, reflecting the immediate inflation channel through which higher energy prices affect macro expectations in energy-dependent economies. The 10-year Bund moved close to 3%, while credit spreads widened by roughly 10 basis points over the week. Equity markets were more resilient, with a more contained reaction overall. The US dollar strengthened throughout the week as risk-off sentiment prevailed. In the US, the front end of the curve now prices less than one rate cut, while 30-year Treasury yields have moved close to 5%, a level closely monitored by investors. In Europe and the UK, front-end rates were largely washed out during the week as markets adjusted expectations and duration followed the move higher in global yields.
ECB – The return of the Hawks
Last week marked a notable shift in ECB communication: for the first time in recent months, the tone of policymakers turned clearly more hawkish. The message to markets is that the ECB’s reaction function in the presence of higher energy prices remains primarily focused on inflation rather than growth risks. If oil prices remain elevated for a prolonged period, the ECB appears willing to hike rates. Inflation markets now price euro area CPI to approach 3% in the next quarter before falling back toward the 2% target roughly one year later. Rates markets reacted quickly to the change in tone, with front-end rates now pricing two hikes in 2026. At next week’s March meeting, we expect the ECB to leave rates unchanged, but the communication is likely to reinforce the increasingly hawkish stance on the inflation outlook.
Algebris Investments’ Global Credit Team
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