War, Tariffs, and Rate Hikes: Market Volatility Hits New Heights

The escalation of the Middle East conflict has sent oil prices soaring and interest rates rising. The September WTI price increase exceeded 10%, marking a three-week gain of over 25%. Despite this surge, some market participants believe that the current stress levels may not be sustained, as evidenced by the large spread between the September WTI and December contract prices.

The US tariff regime has also been a significant factor in the market's volatility. The US has replaced Section 122 tariffs with Section 301 tariffs, which are less focused on balance of payments issues and more on lax forced labor standards. Additionally, the US has threatened 25% tariffs on Brazil and 50% tariffs on Canada, with no exemption under the USMCA.

The week ahead is packed with key events, including three G10 central bank meetings: the Federal Reserve, the Bank of England, and the Bank of Japan. The derivatives market sees a 33% chance of a Fed rate hike, while the swaps market shows practically no chance of a BOJ hike. The odds of a hike in October have increased to over 80%, from around 70% last week.