Brent Crude Hits Three-Year High Ahead of Fed Decision

Market Overview

Global markets remained cautious yesterday amid ongoing Middle East tensions and ahead of the Federal Reserves upcoming rate decision. U.S. equities closed modestly higher, with energy stocks rallying alongside rising oil prices. Airline stocks surged as well, driven by expectations that escalating geopolitical risks would prompt travelers to book flights early to avoid disruptions.

However, downside pressure emerged in select sectors. Pharmaceutical giant Eli Lilly plunged 6.5% intraday after HSBC downgraded the stock to a bearish outlook. Meanwhile, Lululemon also declined more than 1% post-earnings due to weak forward guidance.

Divergence Across Asset Classes

■ Precious Metals & Cryptocurrencies

Safe-haven demand was offset by a softer U.S. dollar. Spot gold hovered around the $5,000 level, briefly breaking below this key psychological threshold before rebounding to approximately $5,005. Silver underperformed, with futures declining 1.6%. Bitcoin edged up 0.38% after consolidating above $74,000, while Ethereum showed relative weakness.

■ Energy & Airlines

Geopolitical risks continued to escalate, with reports suggesting Iran has intensified attacks on Middle Eastern energy infrastructure. Brent crude surged to $103.42 per barrel, marking its highest close in over three years. While elevated energy prices typically pressure costs, they have paradoxically boosted airline booking expectations.

■ Fixed Income & FX Markets

Markets displayed a clear preference for high-quality assets, with long-duration U.S. Treasuries outperforming the short end. The 10-year Treasury yield fell 2 basis points to 4.20%. The U.S. Dollar Index recorded its second consecutive decline, dropping more than 0.3% intraday, providing support for non-dollar assets.

Key Themes to Watch● Regional Fuel Prices Surge

Driven by supply disruptions linked to the Middle East crisis, Brent crude has risen more than 40%, surpassing the $100 mark. However, refined products such as diesel and jet fuel have experienced even sharper increases, with prices in parts of Asia reportedly doubling.

Approximately 60% of crude exports from the Persian Gulf consist of medium-to-heavy grades, which are essential feedstocks for producing diesel, jet fuel, and fuel oil. Substitution capacity outside the Middle East remains limited, exacerbating supply constraints.

● Private Credit Default Rates May Reach 8%

Morgan Stanley warns that the private credit market, particularly in the software sector, is highly vulnerable due to elevated leverage and weak coverage ratios. Default rates could approach pandemic-era highs.

Apollo Co-President James Zelter (Zito) noted that software companies acquired between 2018 and 2022 were often overvalued, estimating the probability of a recession at over 50%. He also criticized the lack of transparency in private equity valuations.

Key Data & Events to Monitor (GMT+8)

• 20:30 (US) – February PPI (YoY & MoM)

• 22:00 (US) – January Factory Orders (MoM)

• 22:30 (US) – EIA Crude Oil Inventories (Week ending March 13)

Overnight

• 02:00 (US) – Federal Reserve Interest Rate Decision (Upper Bound), FOMC Meeting

• 02:30 (US) – FOMC Press Conference