Middle East Proposal Drives Futures Higher
Iranian officials denied any formal breakthrough, while a senior source said indirect communication channels remain open. Reports said messages were passed via Pakistan, and an in-person meeting could take place in the coming days. In regular US trading on Tuesday, the Dow Jones fell 0.18%, the S&P 500 dropped 0.38%, and the Nasdaq 100 slid 0.84%. Earnings due on Wednesday include PDD Holdings Inc, Cintas Corporation, and Paychex, Inc. Chicago Fed President Austan Goolsbee said energy shocks could affect both sides of the Fed’s mandate and that rate-cut timing depends on the conflict and inflation progress. Fed Governor Michael Barr said rates may need to stay unchanged for some time, with inflation above the 2% target and risks linked to the conflict. Looking back at this time in 2025, we remember the market being pulled between geopolitical hopes and Fed warnings. The potential for a US-Iran ceasefire created upward pressure on futures, but underlying caution kept a lid on any real rally. This created a tense, range-bound market where big moves were quickly retraced.Energy Inflation And Volatility Lessons
That caution from Fed officials like Goolsbee and Barr proved justified, as the energy shock they feared did materialize in the second quarter of 2025. We saw WTI crude oil prices spike over 15% between April and June of last year, pushing headline inflation back up temporarily. This delayed the Fed’s pivot and rewarded traders who were long oil futures or held call options on energy sector ETFs. The uncertainty last year was a major driver of options pricing, with implied volatility climbing significantly. We saw the VIX, a key measure of market fear, jump from the mid-teens to over 22 on several occasions following conflicting reports out of the Middle East. This made buying protective puts on indexes like the S&P 500 a profitable, albeit expensive, strategy during that period. As we stand today, the situation has evolved considerably, though memories of 2025 linger. Inflation has finally shown more consistent progress, with the latest core PCE data for February 2026 coming in at an annualized 2.6%, much closer to the Fed’s target. This is a significant improvement from the 3.4% we were still seeing at this point in 2025. This improved inflation picture means the Fed’s hands are less tied than they were last year. While the market priced in only one or two potential rate cuts for the whole of 2025, current pricing on Fed funds futures suggests at least a 70% probability of a first cut by this year’s July meeting. This shift in expectation is a critical change from the “higher for longer” narrative we faced twelve months ago. Therefore, for the coming weeks, the focus should shift from hedging against geopolitical shocks to positioning for monetary policy easing. We see value in strategies that benefit from declining interest rates, such as buying call options on long-duration Treasury bond ETFs. It may also be time to consider selling volatility, as the probability of a major external shock appears lower now than it did throughout much of 2025. Create your live VT Markets account and start trading now.
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