Artillery replaces tweets! Oil, Bonds, and Gold priced synchronously as "war spillover" emerges; market enters extreme risk mode

HuiTong Network, July 21 —— The flames of war in the Middle East are spreading outward from the Strait of Hormuz. Overnight, Kuwait's facilities were attacked, while the Houthi forces simultaneously announced a maritime blockade against Saudi Arabia. Both the Red Sea and the Persian Gulf, two main arteries of global energy, have sounded the alarm at the same time. Bond traders have systematically de-sensitized themselves to Trump's social media posts, with the market no longer pricing in verbal threats but instead closely tracking every actual explosion and act of sabotage. This article will analyze the latest developments from four perspectives—US Treasuries, Forex, Gold, and Crude Oil—highlighting extreme sentiment and the hidden logic behind risk transitions.

On Tuesday (July 21), Kuwait's power and desalination facilities were attacked, violently pushing Brent crude back above $90 (UTC+8), completely dispelling fleeting hopes for a ceasefire. Long-end US Treasury yields jumped, the curve steepened sharply, and inflation panic reignited. Gold fluctuated at high levels amid safe-haven demand and a strong dollar, with the greenback passively strengthening under dual support from safe-haven flows and rate hike expectations. The conflict is spilling over from military targets to Gulf civilian infrastructure, and the tail risk of supply disruptions has expanded abruptly.

Overview

The flames of war in the Middle East are spreading outward from the Strait of Hormuz. Overnight, Kuwait's facilities were attacked, while the Houthi forces simultaneously announced a maritime blockade against Saudi Arabia. Both the Red Sea and the Persian Gulf, two main arteries of global energy, have sounded the alarm at the same time. Bond traders have systematically de-sensitized themselves to Trump's social media posts, with the market no longer pricing in verbal threats but instead closely tracking every actual explosion and act of sabotage. This article will analyze the latest developments from four perspectives—US Treasuries, Forex, Gold, and Crude Oil—highlighting extreme sentiment and the hidden logic behind risk transitions.

Crude Oil: Civilian Facilities Under Attack, Risk Premiums Surge

Iran's strikes on Kuwait's power and water treatment plants have been seen by the market as a key signal of a severe escalation in the conflict. According to prominent international reports, Brent crude surged rapidly from a low of $87.87, jumping 1.38% to reach $90.43 (UTC+8), fully erasing all prior declines sparked by mediation rumors. The narrative of supply disruption is no longer limited to oil tankers in the Strait of Hormuz but has spread toward core civilian infrastructure in surrounding oil-producing countries. The Houthis' threat to blockade the Bab el-Mandeb Strait further tightens alternative channels for Saudi crude exports via the Red Sea. Traders are now proactively pricing in the extreme scenario of “simultaneous blockages of both straits.” In this sentiment structure, oil reacts sluggishly to bearish news but is extremely sensitive to any new physical attacks, with stop-loss orders clustering and easily triggering pulsating market moves.

US Treasuries: Ignoring Tweets, Focusing on Real Firepower

Research from major international institutions reveals an important shift: Trump's social media posts about the Middle East conflict have steadily lost their impact on US Treasury yields over time, and the market now efficiently categorizes them as noise. But this does not mean bond market sentiment has turned complacent. Surging oil prices have directly reignited inflation expectations; US Treasuries quickly gave back overnight gains, the 10-year yield rebounded to 4.606% (UTC+8), and the 2s10s spread widened to 39.5 basis points (UTC+8), with the curve steepening markedly. Behind this is the market repricing the risk of energy costs passing through to core inflation and the possibility that the Federal Reserve might be forced to maintain tight monetary policy or even restart rate hikes. Compared to the verbal sparring on social media, traders are paying closer attention to verified reports of actual physical damage to power plants, desalination plants, and oil tankers—these are the hard variables reshaping rate expectations.

Gold: Safe-Haven Aura Squeezed by Strong Dollar and Hawkish Expectations

The geopolitical chaos has not allowed gold to embark on a strong, one-sided bull run; gold prices are fiercely tugging above $4,000 (UTC+8). Iran's attacks on civilian infrastructure should, in theory, strongly catalyze safe-haven buying, but on the other hand, oil-driven inflation fears are boosting the dollar and supporting a rise in long-end real rates, which significantly offsets gold's appeal. The market currently displays a typical pattern of “war premium” and “central bank hawkish expectations” tearing in opposite directions. Trader sentiment is highly polarized: one camp bets that escalating conflict will ultimately trigger panic gold buying, while the other expects the high-rate environment to continue suppressing zero-yield assets. This makes gold volatility remain elevated, significantly increasing the difficulty of directional trades.

Dollar: Dual Roles Support Passive Strengthening

The dollar is simultaneously playing roles as a safe-haven asset and an inflation hedge. The US-Iran conflict spilling over into the surrounding area has pushed up global risk aversion, leading funds to customarily flow into the dollar; meanwhile, rising energy prices have reinforced the market's speculation that the Fed will maintain a tight stance, with interest rate advantages providing extra support, keeping the dollar moderately strong against most currencies. However, this logic carries vulnerabilities—if the conflict continues and sharply pushes up gasoline prices in the US, eroding consumption capacity, the dollar's safe-haven premium could give way to concerns about stagflation damage. For now, external turmoil has temporarily granted the dollar passive strength, but its resilience highly depends on whether subsequent economic data show a deterioration in endogenous dynamics.

Trend Outlook

In the coming days, oil prices will remain highly sensitive and exhibit asymmetric reactions to geopolitical news. Any further attacks on civilian infrastructure could push Brent to higher levels, while ceasefire rumors may only trigger brief sharp drops, with bulls dominating sentiment. The long end of the Treasury yield curve still faces upside risk, and the steepening trend is likely to continue. Gold is expected to remain highly volatile in both directions, with alternating safe-haven and interest rate suppressing pulses dominating the short-term rhythm, making it difficult for a stable trend to form. The dollar is likely to maintain a moderately strong consolidation, but discussion of US stagflation risks will cap its upside slope. Looking ahead, if the conflict continues to erode the global supply chain and drive up core inflation, the stagflation narrative will replace pure supply risk concerns, presenting challenges for stock-bond portfolios while enhancing the relative value of physical assets and cash instruments. The key monitoring window lies in the actual shipping volume through the Strait of Hormuz and Bab el-Mandeb, and whether diplomatic channels can produce credible buffer solutions. The tail risk is a misjudgment triggering a broader regional war, which is unlikely but, if it occurs, would dramatically rewrite the pricing of all assets.

[FAQ]

Why are bond traders no longer responding to Trump's posts?
Research from major international institutions shows that as the conflict persists, the short-term shock effect of these social posts has clearly diminished, and the market now classifies them as emotional “noise.” Traders instead adjust rate expectations based on verifiable physical destruction and actual supply disruptions, as verbal threats can no longer sustainably shake yields.

What does the attack on the Kuwait power plant signify?
The conflict is spilling over from military targets to the civilian infrastructure of GCC countries, indicating a sharp rise in the risk of escalation. This not only directly threatens Kuwait's electricity and freshwater supply, but also prompts the oil market to proactively price in more unexpected supply disruptions.

How serious is the Houthi maritime blockade threat?
The Houthis’ declaration of a blockade at Bab el-Mandeb, combined with Iran’s control of the Strait of Hormuz, creates a two-pronged choke point. If both key maritime routes are severely blocked simultaneously, about one-third of the world’s seaborne oil trade would be disrupted globally, and the market is far from adequately pricing this tail scenario.

Is the dollar now safe?
In the short term, the dollar is passively firm due to safe-haven demand and rate hike expectations, but if energy price surges severely impact US domestic consumption and intensify stagflation worries, the dollar’s safe-haven nature could weaken. Traders should be wary of a subtle shift in narrative from “strong dollar” to “stagflation damage.”

Why hasn't gold surged alongside the conflict escalation?
Gold is caught between geopolitical safe-haven demand and central bank hawkish expectations. War and inflation are long-term bullish for gold, but rising rates and a strong dollar continuously suppress its upside momentum. Under the current structure, gold is more likely to remain in a state of high, volatile swings rather than embark on a clear bull run.