Problematic Rates Hold Back Relief Rally as Crude Oil Falls on Iran Progress | Investing.com

Crude oil falls further on progress with Iran. Despite further attacks in the region, progress is being reported in negotiating an agreement to permanently end hostilities with Iran and the resumption of normal flows through the Strait of Hormuz. Crude oil is down 3% today, with WTI below $74/bbl, as low as it’s been since the first week of the conflict.

Holding back a continued relief rally are higher interest rates. The US 2-year yield is up another 3bps, to 4.21%, up 15bps since Kevin Warsh spoke at the Fed rate decision meeting last Wednesday. This is the highest since late 2024. The 10-year is up 5bps, back to 4.50%, which, outside the inflation fears since the Iran war broke out, is also the highest since late 2024. This is certainly not what Trump was hoping for by replacing Powell as chairman of the Fed.

These movements in interest rates have moved the US dollar index up to 100.71, the highest since early 2025. Global interest rates are falling: the UK and Germany are down 4bps today, on the lower crude prices. Growth equities are under pressure today as higher interest rates weigh on the discount rate applied to future earnings.

The AI trade remains focused on the picks and shovels to build out the data centers, while the profit model of selling AI services remains a bit murky. The Magnificent 7 has gone from buying back $200B a year in shares to going free cash flow negative to fund their data centers. Today, Alphabet (GOOG) announced the defection of key AI engineers to competitors, taking the shares down 6.6%.

The trend remains positive, with a further relief rally in the wings if the Iran peace negotiations can be finalized, but the interest rate movements can be problematic if the worst-case rate increases come to roost.