Markets look past conflict, but oil and inflation risks remain: Peter Cardillo

Global equity markets appear to be signalling confidence that geopolitical tensions may soon ease, even as sporadic military flare-ups continue to dominate headlines. Investors across major markets are increasingly behaving as though the worst phase of the conflict has already been priced in during the sharp volatility witnessed earlier this year.

Speaking to ET Now, market commentator Peter Cardillo from Spartan Capital Securities observed that investors are largely betting on an eventual resolution to the conflict despite intermittent exchanges between the United States and Iran. According to him, markets are becoming accustomed to periodic flare-ups and are instead focusing on the broader expectation that hostilities could gradually wind down.

Oil Prices Emerge as the Biggest Threat

While equities have remained resilient, crude oil continues to be the primary source of concern for global investors and policymakers. Cardillo pointed out that oil prices briefly surged back toward the $100-per-barrel mark after fresh reports of fighting emerged, underlining how sensitive energy markets remain to geopolitical developments.

The larger issue, however, may not be temporary spikes but the persistence of elevated crude prices over a prolonged period. Even if oil retreats to the $80-$85 range, the economic consequences could still be significant. Sustained high energy prices threaten to keep inflation elevated globally, creating fresh complications for central banks already struggling to balance growth and price stability.

According to Cardillo, the inflationary impact from higher crude prices has not yet been fully reflected in economic data. That delayed effect could become increasingly visible in the months ahead through rising fuel costs, transportation expenses, and broader consumer prices.

Consumers Beginning to Feel the Pressure
The ripple effects of expensive crude are already becoming evident in several sectors. Airline ticket prices, for instance, have climbed sharply as carriers pass on higher fuel costs to passengers. Gasoline prices in the United States have also moved substantially higher, placing additional strain on household budgets.

Higher fuel expenses eventually reduce discretionary consumer spending, a trend that economists closely monitor because of its broader implications for economic growth. If households are forced to allocate more income toward energy costs, spending across retail, travel, and services could weaken over time.

Cardillo suggested that unless crude prices return closer to the $60-$65 range, inflation pressures are likely to remain stubbornly high. Such a scenario would make it difficult for central banks, including the US Federal Reserve, to begin cutting interest rates anytime soon.

Central Banks May Stay Hawkish
Markets had earlier anticipated that several global central banks would begin easing monetary policy as inflation moderated. However, persistent energy inflation may now force policymakers to maintain a cautious stance for longer.

Cardillo noted that instead of rate cuts, some central banks could even be pushed toward further tightening if inflation remains elevated. That possibility introduces a new layer of uncertainty for financial markets, especially after the strong rally in equities over recent months.

Higher interest rates typically increase borrowing costs for businesses and consumers alike, while also reducing the attractiveness of risk assets. Investors are therefore closely monitoring energy prices as a critical indicator for the future direction of monetary policy.

Tariff Uncertainty Adds Another Layer of Risk
Apart from geopolitical tensions and inflation concerns, markets are also navigating uncertainty surrounding US trade policy. Recent legal setbacks for former President Donald Trump’s tariff measures have complicated the outlook for future trade actions.

Cardillo noted that US courts have recently ruled against some of Trump’s tariff policies, raising questions about the administration’s ability to impose fresh duties, particularly on the European Union. Although Trump has continued to threaten additional tariffs if trade agreements are not finalised, the legal challenges could limit the durability of such measures.

For markets, the combination of geopolitical uncertainty, elevated oil prices, inflation concerns, and unresolved trade tensions creates a complex macroeconomic backdrop. Yet despite these risks, equities have so far remained remarkably stable, suggesting investors still believe the global economy can navigate the turbulence without a severe downturn.