The US and Iran exchanged new strikes late Sunday and early Monday, extending their series of retaliatory attacks. The two countries gave conflicting statements about whether the Strait of Hormuz is open to shipping. That uncertainty makes the waterway - a key chokepoint for global oil - a risky route.
US-listed shares of SK Hynix Inc., a South Korean chipmaker, fell 5.5%. A selloff in South Korean stocks driven by artificial-intelligence concerns spilled over and hurt US semiconductor shares.
A comment from Chris Larkin, who works at E*Trade owned by Morgan Stanley, noted, "The ongoing swings in semiconductors has made it difficult for tech to mount a sustained push to the upside." He also warned that "escalating hostilities and rising oil prices won't help the bullish cause."
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All eyes turn to Tuesday's US consumer price index (CPI) report for June. Analysts forecast that the CPI will record its first month-over-month drop since the pandemic began. That would be a welcome sign for the Federal Reserve, which has been fighting high inflation.
But Larkin warned: "Headline inflation numbers are expected to cool this week, but the market may not get as much of a boost from good news if traders think oil is headed higher again." On Wednesday, the producer price index (PPI) for June will be released. It may show continued upstream cost pressures, meaning inflation could still be lurking beneath the surface.
Earnings reports for the second quarter start on Tuesday, led by big US banks. And Kevin Warsh, the Federal Reserve chair, is scheduled to testify before Congress for the first time on Tuesday and again on Wednesday. His words will be watched closely for hints on interest-rate policy.
The Strait of Hormuz is one of the world's most strategic maritime chokepoints, through which roughly 20% of global oil passes daily. Any sustained closure or blockade can send crude prices spiking, as seen during previous US-Iran confrontations. In this instance, Trump announced a renewed US naval blockade and a 20% tariff on all other cargo moving through that vital strait. That added fee could further squeeze global shipping lanes, compounding upward pressure on energy costs.
Historically, tensions in the Strait of Hormuz have led to sharp oil price spikes. The current escalation, combined with the new 20% tariff on non-oil cargo, could further strain global supply chains and keep energy costs elevated.
For an economy already battling sticky inflation, such a shock would complicate the Federal Reserve's path toward rate cuts. Meanwhile, the technology sector's weakness - driven by worries over overvaluation in AI-related chips - adds another layer of risk for equity markets already on edge.
These dual pressures - geopolitical instability driving oil prices and a tech sector correction - have left the S&P 500 and other major indices vulnerable to further declines. Market participants are closely watching the upcoming data and testimony for signs of how the Fed might respond to the evolving landscape.
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