Iran conflict and Strait of Hormuz closure drive energy shock and rate fears for Monday

Global markets on Monday are likely to be driven primarily by the ongoing conflict involving Iran and the continued closure of the Strait of Hormuz, which is creating an energy shock and pushing inflation expectations higher worldwide. The disruption to one of the world’s most important oil shipping routes is keeping crude prices elevated, raising fuel and transportation costs for businesses and consumers. In turn, this is feeding into higher projected headline inflation, with the OECD recently indicating that U.S. inflation could climb to around 4.2% this year due largely to the spike in energy prices. This inflation backdrop has fundamentally shifted expectations for central bank policy, especially for the U.S. Federal Reserve. Futures markets have moved from anticipating multiple rate cuts this year to now pricing in a high probability that rates will remain unchanged, and even assigning meaningful odds to a potential rate hike. Higher-for-longer interest rates increase borrowing costs for companies and households and typically weigh on stock valuations, particularly for growth-oriented sectors that depend more on future earnings. This repricing of interest-rate expectations has already contributed to broad equity weakness, with major indices such as the S&P 500 down year-to-date and growth stocks underperforming more sharply. Heading into Monday, sentiment is fragile and highly sensitive to any new headlines about Iran or potential diplomatic progress. Markets have been reacting in a pattern: when there are signs of constructive negotiations, oil prices tend to fall and equities rally; when talks stall or tensions escalate, oil jumps and stocks retreat. This headline-driven volatility is likely to continue to dominate trading at the start of the week, as investors reassess the balance between geopolitical risk, energy supply concerns, inflation pressures, and the path of global interest rates.