Imagine a scene straight out of the drama The Big Short, but instead of subprime mortgages, the ticking time bomb is oil, and the protagonist isn't a nerdy hedge fund manager, but the President of the United States himself. The opening salvos of this week have sent shockwaves through global markets, with Brent crude surging to $114 a barrel, a 56% spike since late February, and LNG prices in Asia jumping 55% since the start of the war. These are not mere blips; they are seismic shifts, reshaping the economic landscape overnight.

The paradox: everything Trump hates is happening

For President Donald Trump, the current market environment must feel like a cruel joke and the perfect storm before the November midterm elections. Everything he detests is unfolding before his eyes.

Higher oil prices and the inflation threat

The surge in crude is a direct hit to American consumers and businesses, threatening to derail the economic momentum Trump has sought to cultivate. Gasoline prices have jumped 19% over the past month, with the national average now at $3.45 per gallon. Goldman Sachs warns that if higher oil prices persist, inflation could rise from its current 2.4% to 3% by year's end, a red flag for voters already squeezed by rising costs. The political calculus is stark: higher pump prices risk eroding the Republicans' midterm prospects, especially in battleground states like Texas, North Carolina and Georgia, where diesel prices have spiked by over $1 per gallon.

Lower stock market and supply chain chaos

Equity markets are wilting under the weight of geopolitical uncertainty, with the S&P 500 and Nasdaq both posting sharp declines. But the pain extends far beyond Wall Street. The Iran conflict has disrupted global supply chains, causing shortages and price spikes in critical sectors:

• Semiconductors: the Strait of Hormuz blockage has delayed shipments of helium and sulfuric acid, essential for chip manufacturing. Production costs for semiconductors are rising, threatening everything from consumer electronics to aerospace and defence.
• Automotive: aluminium and plastic feedstocks, vital for car parts, face 15-25% price hikes. Automakers are bracing for material cost increases of up to 25%.
• Agriculture: urea prices have surged 52% year-over-year, and nearly half of global urea exports are now at risk. Urea is the world's most widely used nitrogen fertiliser. Farmers in the U.S. and Asia face soaring fertilizer costs just as the spring planting season begins, raising the spectre of food inflation later in the year.

Fed's waning conviction

The Federal Reserve, already divided, has held firm on rates, despite mounting inflationary pressures. At its March meeting, even the most dovish members voted to keep rates steady, citing "sticky" inflation and the uncertain impact of the Iran war. The Fed's forecast now shows only one rate cut projected for 2026, down from earlier expectations of two or more. Chair Powell's message was clear: inflation is not coming down as hoped, and the Fed is in no rush to ease rates.

Higher bond yields

The yield on the 10-year Treasury has surged to 4.41%, as investors price in persistent inflation and the Fed's hawkish stance. This is the classic "bear flattening" scenario, where short-term rates rise faster than long-term yields, a pattern that often precedes economic slowdowns. The bond market's reaction is a vote of no confidence in the Fed's ability to tame inflation without choking off growth.

The bond market's reaction is particularly telling. A "bear flattener" occurs when short-term interest rates rise more rapidly than long-term yields, typically in response to expectations of tighter monetary policy. This flattening of the yield curve is often interpreted as a signal of economic slowdown, as higher short-term rates squeeze borrowing and spending. In the current environment, the Fed's reluctance to cut rates, amidst inflationary pressures from oil, is only adding to the anxiety. The message from the bond market is clear: brace for turbulence.

Stronger US dollar

While a strong dollar is usually a sign of confidence, in this context, it exacerbates the pain for emerging markets and US exporters. A rising greenback makes dollar-denominated debt more expensive for foreign borrowers and squeezes American companies competing abroad. For Trump, whose trade policies have already roiled global markets, a stronger dollar is the last thing he needs.

The TACO trade

Enter the "TACO trade", an acronym for "Trump Always Chickens Out". Coined by Wall Street to describe Trump's pattern of making bold policy threats, especially on tariffs, only to backtrack when markets react poorly, the TACO trade has become a staple of investor strategy. The logic is simple: buy the dip after a tariff announcement, then sell the rally when Trump inevitably softens his stance.

But the current crisis is testing the limits of this playbook. The TACO trade thrives on predictability: markets bet that Trump will blink first, easing tensions and allowing asset prices to recover. However, the escalating conflict in the Middle East, with its direct impact on oil supply and global inflation, is not a tariff spat with China. The stakes are higher, the variables more complex and the room for manoeuvre much narrower. If the conflict drags on and oil prices remain elevated, the market's faith in Trump's ability to "chicken out" could wane. In that scenario, we may see not just a TACO moment, but a full-blown market reckoning.

The immediate future hinges on two critical factors:

• Trump's Appetite for War: the President has signalled that he wants oil prices to fall, but his leverage is limited. Even if the US pulls back, Iran and Israel may not. The risk of further escalation and with it, sustained oil price spikes, remains high. The longer the conflict persists, the greater the economic damage, and the harder it will be for Trump to pivot to a more conciliatory stance.
• Central banks' next move: with inflation expectations rising and the labour market showing signs of weakness, the Fed is caught between a rock and a hard place. Rate cuts could ease financial conditions but risk entrenching inflation. Inaction could tip the economy into recession. The March meeting minutes reveal a Fed that is deeply divided, with some members even open to further hikes if inflation fails to cool.

The coming weeks will be a test of nerves, for Trump, for the Fed and for the world. The TACO trade may yet reassert itself if the president finds a way to de-escalate tensions. But if the conflict drags on and oil prices remain elevated, the market's faith in Trump's ability to "chicken out" could wane. In that scenario, we may see not just a TACO moment, but a full-blown market reckoning. For now, buckle up: this ride is far from over.

Dr Ovidiu Tierean is a Senior Advisor at PKF Malta