Middle East conflict pushes oil prices higher; high interest rates put heavy pressure on stocks and bonds

The market's main theme this week is Middle East hostilities pushing up crude oil, while high interest rates continue to weigh on stocks. Nasdaq-100 ETF QQQ has fallen a cumulative 5.39% over the past month, and the broader market is generally weak. ETF Radar had several of its convictions enter tradable status this week.

This week there are five theme lines, called out one by one:

• Federal Reserve rate cycle: Market commentary centers on "where to after the rebound in government bonds," and rate-cut expectations remain limited.
• U.S.–Iran war: Saudi Arabia and the UAE were hit in succession, and air incidents around Iran have escalated. Japan released a white paper saying the Middle East crisis has exposed the country's energy vulnerability.
• UK gilts and the Bank of England cycle: The London market closed lower on Friday, UK consumer confidence continued to deteriorate, but corporate performance beat expectations, showing a "two-speed economy."
• AI compute capital expenditure: Microsoft exited the UK data center cooperation project Nscale, while data centers are driving the most active industrial real estate market since 2022.
• Russia–Ukraine war: Some commentaries say Putin is playing "hostage geopolitics." The Iranian president will visit Moscow next week.

This Issue's Map

Read the first row as: the straits are clogged, oil is expensive, rates can’t come down, equities and long bonds are under pressure. The second row is another, independent matter.

Key changes this week

No ETFs reversed direction this week, but multiple convictions entered tradable status or clearly upgraded:

• BNO: One week ago it was in a nascent stage, confidence 0.50; now it is tradable, confidence 0.78.
• USO: One week ago confidence 0.55; now upgraded to "multiple pieces of evidence confirmed," confidence 0.70.
• SMH: One week ago direction leaned bearish, confidence 0.50; now it has turned bullish and is tradable, confidence 0.73.
• VTI: One week ago confidence 0.55 and direction undecided; now it is bearish, confidence 0.78.
• IWM and TLT: One week ago both were in signal decay with confidence only 0.31 and 0.28. Now both have returned to "evidence confirmed," with confidence up to 0.68 and 0.62.
• QQQ: Confidence 0.45, direction leans bearish; this is a newly established conviction.

Main story 1 this week: Middle East hostilities, oil channels still clogged

The conflict did not cool this week. October 18, Iran said two tankers struck mines in the Strait of Hormuz. October 22, a Saudi airport was attacked, killing one person. October 23, oil leakage from a tanker attack appeared on a UAE beach. October 24, Saudi Arabia intercepted a ballistic missile heading toward Riyadh. The U.S.–Iran war theme added 31 events in the past 7 days, up from 23 in the prior 7 days. New events in the Red Sea direction fell from 21 to 12.

The transmission chain is straightforward: channels are disrupted, spot supply tightens, and nearby oil is much more expensive than forward oil. In professional terms, this "front-month dearer than later months" is called backwardation (spot premium). Funds that track front-month contracts must roll expiring contracts into the next ones each month. Rolling into cheaper farther-month contracts generates a small additional return.

First, look at BNO, which tracks Brent crude. It actually rose 5.66% last week and 19.01% over the past month. ETF Radar's 1–3 month outlook is also positive and signals are consistent. The model logic is: strikes have hit shipping and offshore supply routes, pushing spot physical tightness higher; front-month premium deepens and roll yield turns positive. The past month’s price action is aligned with this view — tape (actual market price behavior) validated the model.

Next, USO, which tracks U.S. WTI. It rose 4.80% last week and 14.29% over the past month. Looking ahead, ETF Radar’s model is also positive with consistent signals. The reading is: WTI front-month 103.27, the 12-month contract 82.69, implying an annualized slope of about 24.9%. The larger this number, the more the market judges the present shortage to be severe, and the more attractive roll yield for holding front-month contracts becomes.

A reminder: both funds have already climbed quite a bit over the past month. The model assesses whether supply disruption can persist and whether roll yield will continue; it does not imply prices will keep rising at the same pace.

Main story 2 this week: Inflation sticky, high rates weigh on stocks and long bonds

Connection: this is downstream of Main story 1, with energy price increases being one background for persistent inflation.

First look at some rate readings. The U.S. 10-year Treasury yield is 5.00% (as of October 23), down 9bp over the past 5 trading days and down 18bp over the past 20 trading days. The 2-year is 4.69%. After subtracting price effects, lending to the U.S. government for ten years nets 2.64% (as of October 22). That return is available with virtually no risk, so companies that need to borrow and assets that take many years to generate profits must see their valuations revised downward.

There are movements in credit markets as well. High-yield bond credit spreads are 3.40% (as of October 22), widening 60bp over the past 20 trading days. This number is the extra interest riskier companies pay over the U.S. government. When it widens, markets are more cautious toward such companies. Also, federal funds futures imply a rate path of about 3.88%, indicating the market is not pricing a meaningful rate cut.

VTI is the U.S. total market ETF. It fell 0.28% last week and 1.78% over the past month. ETF Radar’s 1–3 month outlook is biased negative with consistent signals. The trigger for this view is a somewhat hawkish inflation reading plus worries about technology stocks. "Somewhat hawkish" means data are on the strong side, making rate cuts seem more distant. This conviction is aligned with the past month’s price action.

IWM is the small-cap ETF. It actually rose 1.96% last week but is still down 2.21% over the past month. Looking forward, the model is negative on IWM with consistent signals, which is opposite last week’s rebound. The model focuses on 1–3 month pressure: small companies face higher financing costs and more fragile margins, making them more sensitive to high rates than larger firms. One rebound last week has not changed this conviction; the past month's performance is also aligned with the view.

TLT is the long-duration U.S. Treasury ETF. It rose 1.61% last week and 2.55% over the past month. ETF Radar’s outlook for TLT is biased negative but signals are moderate: the two related mainlines give confidences of 0.62 and 0.45 respectively. Here the past month’s price is clearly at odds with the model. The 10-year yield has indeed fallen about 18bp over the past 20 trading days, and long bond prices rose accordingly, which contradicts the system’s earlier expectation that rates would continue to rise. The market voted "no" over the last month; this is worth monitoring.

The system’s bearish view rests on two points. First, in futures markets, bearish positions on long-term Treasuries are at extreme levels relative to their own history — the latest net shorts are about 154,000 to 163,000 contracts. Second, federal funds futures have not priced a significant rate cut.

Normally Treasuries are insurance for stocks: when stocks fall, money flees to Treasuries and they rise. But if stocks fall because rates are too high, Treasuries might also fall and that insurance fails. This is precisely why the model watches VTI and TLT together.

Main story 3 this week: AI megacorps keep spending, semiconductor stocks are falling

Connection: this is independent of the two stories above — another separate development this week.

There were three items of news this week. First, according to THE STREET, NVIDIA has clearly prioritized capital spending over buybacks and dividends. Second, data centers are driving the busiest industrial real estate market since 2022. Third, Microsoft withdrew from the UK Nscale data center collaboration, which is a negative datapoint.

The transmission chain is: megacorps prioritize construction spending, boosting equipment, storage, and foundry orders, and improving semiconductor supply-chain revenues. SMH is the semiconductor ETF. It actually fell 2.33% last week and is down 13.08% over the past month. ETF Radar’s 1–3 month outlook is now positive with consistent signals; one week ago this view was bearish with confidence 0.50.

A point to emphasize: the past month’s price has persistently diverged and the decline is sizable. The system’s rationale is: megacorps are directing cash into buildout instead of buybacks and dividends, which is an enterprise-level confirmation of industry demand. The 13% price drop shows the market has other concerns. Whether the model’s conviction materializes requires follow-up order and capital expenditure data.

Oil shock readings this week

Overall, this round of shocks is continuing, with some indicators easing. The following compares 5-day averages to about one month ago:

• Physical tightness: Brent spot vs front-month futures spread is 13.2 USD/bbl, one month ago 17.1, narrowed by 3.9, judged as easing.
• Futures curve: Brent front-month vs 6th-month spread is 14.9 USD/bbl, one month ago 10.8, deepened by 4.1.
• Strait of Hormuz tanker transit: as of October 18, 7-day daily average 0.6 vessels, prior 7 days also 0.6 vessels; pre-war normal was 45.3 vessels, only 1.3% of normal. Bab el-Mandeb tanker daily average 10.0 vessels, prior 7 days 8.6 vessels, about 84.5% of normal.
• Diesel crack spread: New York Harbor diesel spot vs Brent spot spread is 93.4 USD/bbl, one month ago 95.8, roughly unchanged.

Watch for next week

• Strait transits and Gulf attacks: Hormuz tanker daily average is only 0.6 vessels; whether the next update shows a rebound is the primary signal ETF Radar uses to judge the oil theme.
• Iranian president’s visit to Moscow: Reports say President Raeisi will meet Putin next week. On the Russia–Ukraine mainline, UNG fell 10.13% last week; watch energy supply developments after the two leaders’ talks.
• Rates and credit: Whether the 10-year yield continues to fall and whether high-yield spreads keep widening will affect whether TLT’s divergence can converge.

Summary

This week’s mainline is that Middle East supply shocks have pushed up oil, and inflation plus high rates are weighing on stocks and long bonds. AI capital expenditure is another independent line, with prices currently diverging from the conviction.

A reminder: the above are the system’s quantitative model directional forecasts for general markets and do not constitute investment advice tailored to you; consult a licensed investment advisor before investing.