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April was an extraordinary month for risk assets. The Nasdaq surged 16.3%, the Nikkei 16.6%, and the S&P 500 10.8% — both US indices closing at fresh all-time highs on Friday. The DAX added 7.1%, the FTSE MIB 8.9%, and even the ASX managed 3.0%, although it lagged as the RBA's hawkish posture weighed on sentiment. It was the S&P 500's fifth consecutive weekly gain, carrying it above its pre-war level — a rebound driven by a robust US earnings season (84% beat rate across 63% of the S&P 500 reported) and, as Andrew Hunt argued last week, an estimated US$300–400 billion per month in stealth liquidity  from the Fed, Treasury and PBOC combined.

Then Sunday happened. Iran launched ballistic missiles, cruise missiles and drones against the UAE in retaliation for President Trump's "Operation Freedom", a newly announced attempt to escort the roughly 2,000 vessels stranded in the Persian Gulf through the Strait of Hormuz. UAE defences intercepted the bulk of the barrage, but drones struck the industrial zone at Fujairah port, the terminus of the critical bypass pipeline carrying 1.8 million barrels per day of UAE crude into the Gulf of Oman. The extent of the damage to the pipeline infrastructure remains unknown. Brent jumped 4.7% to US$113, US 10-year Treasuries rose 8 basis points to 4.45%, and US equities pulled back from their record highs. Polymarket now prices only a 20% chance of the Strait reopening by the end of May, and 60% by July. The choice of target is telling. Iran did not strike the US directly, nor Saudi Arabia or other GCC members. It singled out the UAE, the country that had just left OPEC after six decades and that has been at odds with Riyadh over Yemen, Sudan and the Abraham Accords. Tehran appears to be attempting to divide the GCC into those willing to live with a new regional equilibrium and those who are not, while avoiding the direct US confrontation that would follow an attack on American vessels. So far it seems that, despite Operation Freedom, the risk remains too high for commercial ship owners to attempt the Strait.

Beneath the geopolitical drama, the oil supply picture is deteriorating in ways that markets have yet to fully price. Physical barrels of Gulf-grade crude are already trading at US$140–150, far above the US$108 Brent futures price, a gap that reflects the market's faith in a resolution that has not materialised. Half of global refining capacity depends on Gulf supply, and fuel rationing is already under way across parts of Asia. A piece in the Financial Times this week argued that while global oil intensity has fallen 60% since 1973, the remaining consumption is concentrated in high-value, non-substitutable uses — road freight, aviation, shipping, petrochemicals — where disruption cascades through supply chains in sudden, non-linear ways. The longer the twin blockades persist, the more likely a crisis-level adjustment becomes in developed economies.

Central banks spent the week holding rates and hoping for clarity. The Fed's four dissenters — the most since the 1990s — signalled growing discomfort with a dovish bias as core inflation nears 3.2%. The ECB and Bank of England both held, flagging second-round inflation risks. The Bank of Japan stood pat despite three board members voting to hike and further yen intervention by the MOF. 

The RBA duly hiked to 4.35% this afternoon, undoing all three of last year's cuts, citing higher fuel prices and early signs of second-round effects on broader goods and services. The board left the door open to further tightening, warning that underlying inflation would continue to rise and peak at 3.8% in the June quarter. Growth forecasts were cut sharply: GDP now expected at just 1.3% in 2026, the lowest medium-term outlook in the RBA's forecasting history, with unemployment drifting to 4.7% by mid-2028. Critically, those baseline forecasts assume a relatively quick resolution to the Iran conflict and oil averaging US$100, well below today's US$114. In an adverse scenario with oil at US$145, unemployment could reach 5.1%.

The week ahead brings US non-farm payrolls on Friday. The Trump–Xi meeting that takes on added significance after Beijing ordered Chinese refiners to ignore US sanctions on Iranian oil. The April equity rally was remarkable, but Sunday's missile strikes are a reminder that the gap between financial markets and the real economy keeps widening and, while everyone hopes that sanguine financial markets have the inside line on this, the crunch point where supply shortages have a real economic input must be approaching.