Oil Surges 10% on U.S. Re-blockade of Hormuz Strait; Bonds and Stocks See Sell-Off

Market Jitters Over Fed Rate Hike
'Nacho Trade' Strategy Revived on Wall Street
Focus on Core Inflation and Retail Sales

With U.S. President Donald Trump declaring the re-blockade of the Strait of Hormuz, international oil prices have surged by nearly 10%. In response, investors simultaneously rushed to sell both bonds and stocks. On Wall Street, the "NACHO Trade"—a strategy based on the outlook that normalization of the Strait of Hormuz is unlikely—has made a comeback. As concerns mounted that persistently high oil prices would lead inevitably to inflation, the prospect of a sharp hike in U.S. benchmark interest rates dominated market sentiment.

Declines Across Both Safe and Risk Assets

As of 7:36 p.m. local time on July 13, yields on U.S. 10-year Treasury bonds rose 1.4 basis points (1bp=0.01 percentage point) to 4.622% compared to the previous trading day. Yields on the more short-term, interest-rate-sensitive U.S. 2-year Treasuries also increased by 1.9 basis points to 4.282%. According to The Wall Street Journal (WSJ), surging Treasury yields were the result of large-scale investor sell-offs depressing bond prices. The U.S. Dollar Index, which measures the dollar's value against six major currencies, has edged up to 101.27. Spot gold prices, after falling to $3,997 per ounce, rebounded to regain the $4,000 mark, closing at $4,004 per ounce.

There was also aggressive selling in risk asset markets. All three of New York’s major stock indices ended lower overnight. The Nasdaq Index tumbled by 1.55%, weighed down by underperformance in semiconductor stocks, including SK hynix ADR Boost. The Dow Jones Index saw its decline limited, however, as energy stocks benefited from falling oil prices. Bitcoin is also trading at $62,244, down 2.5% over the past 24 hours. Ethereum, the leading altcoin, is showing a 2% decline as well.

AFP Yonhap News

The resumption of military clashes between the United States and Iran has driven up international oil prices, putting downward pressure on the markets. On the European ICE Futures Exchange, September Brent crude settled at $83.30 per barrel, up a dramatic 9.6% from the previous session. Intra-day, it soared to $83.54 per barrel—a one-month high since June 16, just before the memorandum of understanding (MOU) ending hostilities between the U.S. and Iran. According to the WSJ, this daily surge represented the biggest single-day jump in about six years and two months since May 2020. West Texas Intermediate (WTI) crude for August delivery also ended the day up 9.4% at $78.14 per barrel.

On this day, President Trump also announced the re-closure of the Strait of Hormuz and plans to impose tolls on passage. Foreign media reported that this sparked fears that disruptions to energy supplies and rising prices could give rise to long-term, structural inflationary pressure. According to the London Stock Exchange Group (LSEG), the futures market is now pricing in at least one (25bp) rate hike by year-end. Federal Reserve Governor Christopher Waller contributed to the market’s cautious mood with hawkish remarks in his speech at the New York Association for Business Economics (NYABE), stating, “If core inflation for June comes in hot again, the Federal Open Market Committee (FOMC) should consider tightening monetary policy in the near term.” The markets are now hanging on the upcoming June Consumer Price Index (CPI) and Producer Price Index (PPI) releases on July 14, as well as the June retail sales data to be released on July 15.

'NACHO Trade' Strategy Revived on Wall Street

According to the WSJ, the renewed conflict between the United States and Iran has brought renewed attention on Wall Street to the NACHO Trade strategy. NACHO Trade is an acronym for “Not A Chance Hormuz Opens,” reflecting the view that, after the Middle East war, there is virtually no chance the Strait of Hormuz will reopen—except, perhaps, for limited smuggling. This negative perception anticipates that high oil prices and surging inflation will continue until their economic cost becomes unsustainable.

Nacho image

Henry Hoffman, co-portfolio manager at Catalyst Energy Infrastructure Fund, noted, “Markets interpreted the partial reopening of the Strait of Hormuz as meaning the crisis was over far too quickly,” pointing out that the global buffer of oil reserves, acting as a ‘price safety net,’ has shrunk substantially, thereby heightening the risk of further price surges. According to last month’s U.S. Department of Energy report, current U.S. Strategic Petroleum Reserve (SPR) holdings stand at 340.3 million barrels—their lowest level since 1983.

Gulf oil-producing countries are also redoubling efforts to restructure their energy export networks. Saudi Arabia is increasing the volume of oil shipped through pipelines to the Red Sea while expanding the export capacities of their Red Sea ports. The United Arab Emirates (UAE) is investing in both the expansion of pipelines and port infrastructure to bypass the Strait of Hormuz, and Iraq is accelerating efforts to restore overland oil export routes via Türkiye, Syria, and Jordan. Rachel Ziemba, a senior fellow at the Center for a New American Security (CNAS), emphasized that “The likelihood of the Strait of Hormuz returning to normal is essentially zero,” adding that, “if anything, the imperative to invest in alternative chokepoints as quickly as possible has only grown stronger.”

This content was produced with the assistance of AI translation services.