The Iran conflict began as a United States (US)-Israel military operation against a single state actor on 28 February. Nearly five months later it has acquired a regional architecture that makes resolution considerably more complicated. This week the Houthis, operating from Yemen, declared a naval blockade on Saudi Arabia and followed through on 23 July by striking two Saudi oil tankers – the Encelia and the Layla – with drones and missiles in the Red Sea. Saudi state media confirmed the Encelia was hit, causing a fire at the bow. In the same 24-hour window, the US completed its 12th consecutive night of strikes on Iran, Iran retaliated by hitting US military positions in Jordan and Kuwait, and regional mediators presented Washington and Tehran with a proposal for a 10-day ceasefire.
The new strategic player in the war
The Houthi move is deemed tactical, because it serves Iran’s interests well as it opens a second chokepoint without Iran taking direct responsibility for it. While the Strait of Hormuz handles roughly 20% of global seaborne oil, the Strait of Bab el-Mandeb – which the Houthis now threaten – connects the Red Sea to the Gulf of Aden and carries a significant share of Saudi Arabia’s crude exports to Asia. With Hormuz all but closed since the start of the war, Saudi Arabia has been moving oil through the Red Sea to compensate for the Hormuz route’s disruption. That alternative is now under attack. Five tankers changed course to avoid Bab el-Mandeb on 23 July, while the day before, three laden with Saudi crude bound for China and India were turned back, showing that the scope of the supply disruption has widened materially.
The oil price bounces back
Brent crude hit above $100/barrel yesterday, its highest level since late May and gained 4.6% on the tanker strike news alone. That puts Brent on course for a monthly gain of 30%, the third largest jump in a decade. West Texas Intermediate followed at $92/barrel. The possibility of mediation, however, pulled prices back, with Brent settling near $90-to-$91/barrel by 22 July’s close. The market is trying to simultaneously price in a physical disruption that is real and widening, and a diplomatic possibility that is fragile. That combination is producing seesaw price action that makes hedging difficult and forward planning harder.
Is a new ceasefire an option?
The new ceasefire proposal deserves scrutiny. US Secretary of State, Marco Rubio, said publicly this week that Iran is not ready to make a deal. The gap between the diplomatic track and the military track is wide, and a 10-day pause in the conflict will resolve none of the structural disagreements that produced the conflict.
The Houthi dimension complicates any ceasefire further – a US-Iran agreement does not bind the Houthis, who have their own demands. Saudi Arabia has lifted what it describes as a blockade on Houthi-controlled ports and airports, which is entirely separate from the US-Iran negotiation. The naval blockade on Saudi Arabia was declared days after the Yemeni government bombed the airport in the Yemeni capital, Sanaa, to stop an Iranian plane from landing. Multiple actors, multiple objectives, and a bilateral US-Iran ceasefire leaves a number of risks in place.
The three risks
The first risk is an escalation targeting Saudi production infrastructure rather than tankers. Houthi drone and missile capability has improved materially since its Abqaiq strike in 2019, where drone and cruise missiles were launched at the critical Saudi Arabian energy hub. If that capability is directed at Saudi oil facilities, the shock moves from a shipping disruption to a production disruption, which is a different order of magnitude entirely. Independent energy research and data analytics company, Rystad Energy, has been explicit: if Hormuz remains largely closed and the Houthi Red Sea threat intensifies simultaneously, oil prices re-testing and exceeding prior highs is a real scenario.
The second risk is state actor widening. Iran has now struck US military positions in Jordan and Kuwait, both US allies with treaty obligations and active US basing. Those strikes raise the possibility of direct involvement from countries that have so far remained outside the conflict, or of US escalation beyond Iranian territory.
The third risk is the ceasefire itself. A 10-day pause that does not resolve underlying tensions is not stability. Rather it is a window in which all parties rearm and reposition. The 2019 Abqaiq attack and the subsequent non-response established that aggression against Saudi infrastructure was tolerable. The current conflict is testing different limits. If the ceasefire holds and negotiations resume, the market will price-in relief quickly, and possibly excessively. If it fails – and the history of ceasefires in this region argues for caution – the next escalation will kick-off from a higher baseline of disruption than the previous one.
A LOOK AT THE WEEK’S MARKETS
The week’s key themes:
- SARB unexpectedly leaves rates unchanged
- Tech volatility remains as results season unfolds
- Brent crude moves above $100/barrel and is on track for a weekly gain of about 14%
- Tariffs back in focus, drives US dollar higher
Bonds
The US 10-year Treasury yield has climbed to around 4.7%, its highest level since January 2025. Investors reacted to the risk that US President, Donald Trump’s tariff agenda may intensify trade friction with key partners. Stronger energy prices and firm employment conditions also reduced confidence that the US Federal Reserve (Fed) could ease policy soon.
In the United Kingdom (UK), gilt markets remain under pressure, with the 10-year yield moving close to 5.1% and the 30-year yield reaching 5.78%. The move reflects concern about fiscal strain, rising business expenses and pressure on households. Targeted support for some companies offered limited relief, as the jump in oil prices is keeping inflation risks in focus.
In Germany, the 10-year bund yield has reached 3.20%, marking its highest point in more than 15 years. Although the European Central Bank (ECB) left policy rates unchanged, it avoided sounding dovish as energy costs continued to pose an inflation threat. Higher gas prices and increased borrowing needs across the eurozone is adding further pressure to bond markets.
In South Africa, the 10-year government bond yield moved toward 8.9% after the South African Reserve Bank (SARB) surprised markets by keeping the repo rate at 7%. The decision was supported by softer growth and a marginally improved inflation profile. However, higher oil and food-price risks mean investors continue to price in the chance of a more cautious policy path.
Equities
In the US on Thursday, equity futures steadied after a difficult previous session in which technology shares led the market lower. The Dow declined by more than 500 points, while the S&P 500 and NASDAQ retreated by 1.2% and 2.2% respectively. Pressure came from the rise in Brent crude above $100/barrel, renewed geopolitical concerns in the Red Sea, and weaker updates from Tesla and Alphabet.
In the UK, the FTSE 100 ended weaker as investors balanced firmer energy shares against disappointing updates elsewhere in the market. Energy majors, Shell and BP, benefitted from the higher oil price, but losses in telecommunication company, BT, energy services company, Centrica, and low-cost airline, EasyJet, weighed on the index. The ECB’s decision to leave rates unchanged also influenced the broader market backdrop.
In Europe, equities weakened as the oil-price spike renewed concerns about persistent inflation and restrictive monetary policy. The Euro STOXX 50 fell 1.7%, while the wider STOXX Europe 600 lost 1.3%. Bank shares softened despite mostly acceptable results, and the luxury sector also came under pressure after weaker company commentary.
In South Africa, the FTSE/JSE All Share Index finished at 108,335 points on Thursday, losing 1.23% on the day and 1.36% over the month. Despite this short-term pullback, the index is still 8.37% higher over the year. Resource shares were the main drag, as softer precious- and industrial-metal prices weighed on large mining counters. The JSE Top 40 showed a comparable pattern, declining 1.23% for the session while remaining 8.75% ahead over 12 months.
Comodities
Brent crude traded above $100/barrel and was heading for an approximate 14% weekly advance, with geopolitical risk, once again, dominating the market. The combination of continued US strikes on Iran and tougher comments from President Trump reduced expectations of a swift diplomatic breakthrough. Supply anxiety also increased after Iran-backed Houthi militants targeted two Saudi tankers in the Red Sea, while disruptions near the Strait of Hormuz pushed some Asian buyers to consider longer routes via the Suez Canal or around Africa. A pause in loadings at the Caspian Pipeline Consortium’s Black Sea terminal added to the pressure.
Gold eased toward $4,040/ounce as the jump in oil prices shifted the market’s focus back to inflation and US interest-rate risk. Expectations that the Fed may need to remain restrictive reduced the appeal of non-yielding assets. Renewed Tariff uncertainty has added another layer of caution, although geopolitical risks continue to provide enough support for gold to remain slightly positive for the week.
Currencies
The US Dollar Index is trading around 101.3, close to a three-week high, as President Trump’s latest tariff proposals strengthened demand for the greenback. The planned measures cover several large trading partners, including Mexico, Canada, the UK, India, the European Union and Taiwan, with further duties possible on selected Japanese, South Korean and Swiss goods. Higher energy prices, solid US labour data and expectations of a more restrictive Fed also supported the currency.
The euro has moved below $1.139/€ after the ECB kept interest rates unchanged and emphasised that future decisions would depend on incoming data. Softer inflation readings, slower wage growth and weaker activity have lowered the urgency for additional tightening. However, the oil-price move has complicated the outlook by reintroducing energy-related inflation concerns. Markets still expect two cuts before year-end, with September seen as the likely starting point.
The pound has weakened to $1.336/£, a 10-day low, as fiscal concerns and a more hawkish Bank of England (BoE) outlook weighs on investor sentiment. Business cost pressures, household affordability constraints and the recent oil-price increase have all added to inflation worries. Money markets are now pricing in almost 50 basis points of BoE rate increases before the end of the year.
The rand softened to R16.80/$ after the SARB unexpectedly held the repo rate steady at 7%. Policymakers cited weaker growth and a slightly better inflation outlook, but SARB Governor, Lesetja Kganyago, warned that higher oil and fertiliser costs could still filter through to food and core prices. June inflation rose to 5%, while core inflation reached 4.1%, both above the SARB’s preferred target.
*Please note that all information is at the time of writing.
Key indicators:
USD/ZAR: 16.85
EUR/ZAR: 19.18
GBP/ZAR: 22.46
BRENT CRUDE: $98.69
GOLD: $4,046.41
Sources: Al Jazeera, CNBC, ING Think, Reuters, Rystad Energy and US News.
Written by: Citadel Advisory Partner and Citadel Global Managing Director, Bianca Botes.