S&P 500 Struggles as Oil Spike and Policy Uncertainty Weigh on Markets

The S&P 500 is attempting to stabilise but is facing a tougher macro environment as geopolitical tensions, rising energy prices, and shifting interest rate expectations reshape market sentiment. The index is trading around 6690.15, up 6.53 points or 0.10%, but remains below key short term moving averages including the MA10 at 6783.72, MA20 at 6832.41, and MA30 at 6856.65, signalling continued pressure on the upside.

One of the biggest changes in markets has been the sharp reset in interest rate expectations. Traders are no longer fully pricing even one Federal Reserve rate cut this year, compared with two rate cuts expected at the end of February. Fed funds futures now show easing pushed further out as investors question whether the Fed can reduce rates while energy driven inflation risks remain elevated.

Policy expectations are also shifting in Europe. Money markets have fully priced a European Central Bank rate hike by July and a 70% probability of another increase by December, compared with around a 40% chance of a rate cut before year end in February. At the same time, euro area Bund yields have climbed to their highest level in almost two and a half years, while the US two year Treasury yield has reached a six month high, reflecting tighter financial conditions globally.

Energy markets remain a key driver of volatility. Brent crude surged more than 10% at one point to $101.59 per barrel, before easing slightly to $99.21 in Asian trading, still 7.9% higher, even after the International Energy Agency agreed to release a record 400 million barrels from strategic reserves. Despite the intervention, markets remain cautious as supply disruptions tied to the Middle East conflict continue to create uncertainty.

Oil volatility has also surged sharply, with the Cboe oil volatility index (OVX) jumping to 121.01, its highest level since the early stage of the 2020 COVID market shock, highlighting the extreme uncertainty in energy markets.

At the same time, the US dollar has strengthened by more than 2% against six major currencies since the war began, reflecting demand for safe haven assets during periods of geopolitical stress. A stronger dollar can tighten global financial conditions and weigh on multinational earnings, adding another headwind for US equities.

Read more about how traders analyse indices and navigate market volatility, including the key signals investors watch when oil prices surge and interest rate expectations shift.