Explosions everywhere, overnight the market has changed

Source: Wall Street Intelligence Circle

The market is not trading bombs, but whether oil prices can bring inflation back.

The sound of explosions in the Middle East is resonating in financial markets, and the market atmosphere has changed:

- Oil prices once surged 6%, with U.S. crude oil touching $75 intraday;

- Gold prices plummeted intraday, once approaching the $4,000 mark;

- The U.S. 10-year Treasury yield once rose to 4.59%;

- The U.S. dollar index fluctuated up and down but ended basically flat;

- U.S. stock markets were mixed, with the Dow Jones Index down 1.09%, S&P 500 down 0.28%, and Nasdaq up 0.20%.

First, the conflict in the Middle East has escalated again, with the U.S. launching strikes on Iranian targets for the second day in a row, prompting oil prices to continue rising strongly. However, other market responses did not align with the surge in oil prices; traders are focusing today on whether U.S. crude can hold above $75. If it stays above this level, other pressures across global markets will follow.

The $75 level is not just a simple technical threshold, but rather an observation line for the market's shift in pricing model (the boundary between "risk premium" and "energy inflation"). What matters is not that crude oil reached $75 intraday, but whether it can hold this level consistently. If the rise is merely a pulse driven by geopolitical news and quickly falls back to $72-$74, the market will see it as a short-term risk premium; but if it steadily holds above $75 and moves towards $80, the market will begin to systematically upgrade inflation expectations (the probability of a September rate hike has already risen to 69%).

Second, rising oil prices are significant, but the rise in U.S. Treasury yields triggered by higher oil is even more crucial—this is the epicenter of the current market moves. For 10-year Treasury yields, 4.68% is a magical number (the policy tolerance range is 4.60%-4.70%). Whenever it approaches or reaches this area, Trump would usually find a way to give in (or rescue the market)—now, this level is once again very close.

Third, the Nasdaq has held up, which is very important—under previous logic, yesterday's market should have been "Dow down 1%, Nasdaq down 2%." If the index can continue to close higher today, the shock brought by the Middle East flare-up will fade sharply. However, today's observation is not only whether Nasdaq rises, but also three details: can the semiconductor rally spread to software and other growth stocks; can the number of advancing stocks in the S&P 500 improve; and can the Dow and cyclical sectors stop falling.