According to Pepperstone strategist Dilin Wu, the failure of the US-Iran agreement has firmly established uncertainty. The recent strengthening of the dollar coupled with a slight decline in US Treasury yields is a fairly reasonable pricing outcome. After the initial shock of the Odaily subsides, the reaction of US Treasuries may become more complex. Short-term yields may continue to decline slightly due to safe-haven demand, but if oil prices continue to rise, they will quickly re-anchor to higher inflation expectations, thus putting new upward pressure on long-term yields. Monday is also likely to see the energy and defense sectors outperform the broader market, opening with a significant upward gap.
The energy sector is the most direct beneficiary of supply-side contraction, while the defense sector reflects the rising geopolitical risk premium and its more persistent nature. However, the magnitude of market volatility will depend on two key factors—the sustainability of the oil price rally and whether the market confirms that this is a sustained supply shock, rather than just a short-lived, sentiment-driven reaction. (Jinshi)
