Global markets shift focus to inflation and interest rates amid US-Iran tensions

Huo Xing Finance reports: On May 25, while global markets remain focused on U.S.-Iran negotiations and the potential reopening of the Strait of Hormuz, capital is increasingly turning its attention to a deeper issue: when high inflation, high interest rates, and sovereign debt risks coexist, can central banks still stabilize markets as they have over the past decade? Although the U.S.-Iran agreement is gradually emerging—with provisions including limited reopening of the Strait of Hormuz, a 60-day framework, and the resumption of nuclear talks—significant disagreements persist on core issues such as highly enriched uranium, sanctions relief, asset freezes, and the Lebanon front. This indicates that while markets are beginning to price in a de-escalation of conflict, capital has not yet fully returned to a broad risk-on posture. More importantly, a phenomenon rarely seen over the past two years is re-emerging: “expectations of rate hikes are returning.” U.S. interest rate futures markets are now pricing in the possibility of a Fed rate hike as early as October, with full pricing of a 25-basis-point hike by year-end. Fed Governor Waller explicitly stated that if inflation expectations become unanchored, the Fed will still need to raise rates. Meanwhile, internal discussions at the European Central Bank have already begun considering a June rate hike. This means the market’s previously anticipated narrative of “rate cuts to rescue markets” is being replaced by the reality of “persistently high rates.” Underlying this shift is a growing resistance in global bond markets to the past decade’s assumption that “central banks will always backstop markets.” El-Erian has identified the core risk: in past crises—whether financial crises, pandemics, or wars—markets have trusted that central banks would ultimately rescue risk assets through rate cuts, quantitative easing, and fiscal stimulus, making “buy the dip” the most successful global trading strategy. Now, however, high inflation, elevated debt levels, and sovereign credit pressures are constraining central banks’ ability to intervene. For the first time, markets are confronting a scenario where “policy wants to help, but may not be able to.” This is precisely why global assets have recently exhibited sharp divergences. On one hand, U.S. tech and AI stocks continue to hold elevated valuations due to liquidity momentum and growth expectations. On the other hand, U.S. Treasury yields, Japanese long-term bonds, and European bond markets are simultaneously experiencing sharp volatility. This signals that capital is reassessing: if central banks can no longer provide unlimited liquidity in the future, all currently overvalued assets will face renewed pressure from real interest rates and discounted cash flows. In the crypto market, BTC will likely continue to receive short-term support from easing geopolitical tensions and improved risk appetite. However, if global interest rate markets continue to price in further rate hikes, highly leveraged and overvalued assets will still face liquidity contraction pressures. The market’s most critical variable is no longer just war—it is whether the influence of global policy tools on markets is beginning to wane.