Brent Crude Hits Three-Year High Ahead of Fed Decision

Market Overview

Global markets remained cautious yesterday as investors navigated ongoing tensions in the Middle East alongside the upcoming Federal Reserve rate decision. U.S. equities posted modest gains across all three major indices. The energy sector rallied in tandem with rising oil prices, while airline stocks surged on expectations that escalating geopolitical risks could trigger a wave of “preemptive travel bookings.”

However, downside pressure emerged in select sectors. Pharmaceutical giant Eli Lilly dropped 6.5% intraday after HSBC downgraded the stock and turned bearish. Meanwhile, Lululemon slipped more than 1% post-earnings, weighed down by weak forward guidance.

Divergence Across Asset Classes:

• Precious Metals & Cryptocurrencies:

• Safe-haven demand was largely offset by a softer U.S. dollar. Spot gold fluctuated around the $5,000 level, briefly breaking below this psychological threshold before rebounding toward $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 a new three-year high. While elevated energy prices typically pressure costs, they unexpectedly boosted airline stocks due to anticipated demand spikes.

• Rates & FX Markets:

• Investors displayed a clear shift toward higher-quality assets. Long-duration U.S. Treasuries outperformed the short end of the curve, with the 10-year yield falling 2 basis points to 4.20%. The U.S. Dollar Index declined for a second consecutive session, dropping over 0.3%, providing modest support to non-dollar assets.

Key Themes Ahead● Regional Fuel Price Surge

Driven by supply disruption risks in the Middle East, Brent crude has surged over 40%, breaking above the $100 mark. However, refined products such as diesel and jet fuel have seen 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 critical feedstocks for producing diesel, jet fuel, and fuel oil. Alternative supply capacity outside the region remains extremely limited, exacerbating the supply imbalance.

● Private Credit Default Rates May Reach 8%

Morgan Stanley warned that leverage in the private credit market is highest within the software sector, where coverage ratios are also weakest, potentially pushing default rates toward post-pandemic highs near 8%.

Meanwhile, Apollo Co-President Jim Zelter (Zito) highlighted that software companies acquired between 2018 and 2022 were generally overvalued. He estimates that the probability of a recession has exceeded 50%, while also criticizing the lack of transparency in private equity valuations.

Key Data to Watch (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 Events

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

• 02:30 (US) – FOMC Press Conference