Oil Spike Triggers Market Selloff as Tensions Escalate in Strait of Hormuz

US stocks fell for a third consecutive day on Tuesday due to rising tensions in the Strait of Hormuz, which pushed oil prices up and Treasury yields to a 20-month high. The Dow Jones Industrial Average declined by 419.02 points, or 0.79%, to 52,766.88, while the S&P 500 fell 54.67 points, or 0.71%, to 7,631.47.

The escalation in Iran led to a sharp increase in oil prices, with WTI crude rising by 5.2% to $90.22 per barrel and Brent increasing by 4.6% to $94.65. This surge in oil prices has investors worried about inflation and its potential impact on the economy.

Market analysts believe that the conflict could lead to higher energy costs, which would further pressure the Fed to raise interest rates. The latest data shows that rate expectations are shifting, with a 67% to 68% chance of a 25-basis-point hike at the September Federal Open Market Committee meeting.

The market's reaction to the oil price increase was swift and broad, with stocks weaker, oil stronger, and bond prices under renewed strain. The 10-year Treasury yield added 3.8 basis points to 4.795%, indicating that investors are demanding higher returns for inflation risk and geopolitical risk.