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WTI crude oil is approaching $110, the level it has tested multiple times since 2000, visible as the spikes around 2008, 2011 and, most recently, 2022. In each prior test, the S&P 500 ran into stress in the months that followed.

As we highlighted in early April, wheat was likely due for a breakout given its long-run correlation with crude. Since then, it has bounced decisively off the ascending trendline support that has held since the post-2022 lows. Wheat is also historically prone to fast, extreme moves once a structural level breaks.

The 2-Year T-Note is testing the ascending trendline support drawn from its 2023 lows, after recovering from the multi-year low set during the 2022 inflation shock. The current test arrives at a meaningful technical level, particularly given the impending change of the Fed chair and the policy direction it implies.

EUR/USD is pressing the upper boundary of a descending channel that has contained price action since 2014. The pair sits at a decision point: a confirmed breakout above the channel boundary would mark a structural shift, while a rejection here extends a decade-long downtrend.

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WTI crude oil is back above $107 and pressing toward $110, a level that on every prior visit since 2000 has preceded equity market stress. The risk premium that had begun to fade after the April 7 U.S.-Iran ceasefire has been forcefully reset. This week, President Trump told oil executives the U.S. naval blockade of the Strait of Hormuz could last months. Brent surged 7.6% to $119, its highest level since the opening weeks of the Russia-Ukraine war. Hours later, the Federal Open Market Committee (FOMC) held its policy rate steady, but by an 8-4 vote, the most fractured decision since October 6, 1992. As the supply shock works through the data, the policy response has visibly fractured. Which leaves central bankers with an old question: what is the right tool for an inflation impulse you did not create?

Looking back, oil has surged five times since 1970. In 1973, the OPEC oil embargo pushed crude prices up four times. Central banks raised rates aggressively, but inflation kept rising even as the economy slid into recession in 1974-75. In 1979, the Iranian Revolution doubled oil prices again. In response, Fed Chair Paul Volcker raised rates to 20%. While the policy was eventually successful in bringing inflation down, it came at the cost of triggering the deepest recession since World War II. In 1990, oil briefly doubled during the Gulf War. However, with economic growth already weakening, the Fed prioritized the slowdown and cut interest rates. As a result, oil prices normalized quickly and the ensuing recession was mild. In 2008, oil reached $147 before the global financial crisis pulled both oil and stocks down. In 2022, oil reached $130 following the outbreak of conflict between Russia and Ukraine. The Fed raised rates sharply. Oil eventually came down as U.S. shale producers raised output and high prices dampened demand, but bond yields stayed elevated for longer than expected. Five episodes, five different combinations of policy and outcome.

Several things make this episode different. Tariffs add a second supply-side inflation channel on top of oil. The Fed's statement this week pointed to "the effects of tariffs on prices in the goods sector" as the principal contributor to a 3.2% core PCE print. With the blockade of the Strait of Hormuz now signaled to last for months, the supply disruption has become structural rather than transient. And the dollar index (DXY) broke decisively below 100 back in April 2025, a level that historically marks a regime shift toward dollar weakness. It has stayed below since, establishing a longer-term headwind.

This uncertainty is now visible in markets, as a sharp repricing in futures – from anticipating further Fed cuts to now pricing almost none – has driven the 2-Year T-Note back to its ascending trendline support from the 2023 lows (Figure 3). This was also Chairman Powell's last policy meeting; Kevin Warsh, the President's chosen successor, cleared the Senate Banking Committee on the same day and is expected to be confirmed in May. Looking back, the S&P 500 has not held up well when central banks are this uncertain and oil is this elevated. At all-time highs while crude tests $110, the index looks the most exposed.

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We conclude with the following hypothetical trades:¹

Case study 1: Long Wheat futures

If we hold a bullish view towards wheat prices, we would consider taking a long position in Wheat (ZW) futures at the current price of 654, with a stop-loss below 620, a hypothetical maximum loss of 654 – 620 = 34 points. Looking at Figure 2, if the breakout holds as the oil-driven supply shock continues to feed through, wheat prices have the potential to climb to 800, the prior congestion zone from the 2022-2023 cycle, resulting in 800 – 654 = 146 points. Each Wheat futures contract represents 5,000 bushels and each point move is 50 USD. Mini Wheat (XW) and Micro Wheat (MZW) futures contracts are also available in 1/5 and 1/10 of the standard size, respectively.

Case study 2: Short E-mini S&P 500 futures

If we hold a bearish view towards the U.S. equity market, we would consider taking a short position in E-mini S&P 500 (ES) futures at the current price of 7,195, with a stop-loss above 7,400, a hypothetical maximum loss of 7,400 – 7,195 = 205 points. Looking at Figure 1, if WTI crude oil holds above $110 and the historical pattern of equity stress following each prior test of the level reasserts, the S&P 500 has the potential to retrace toward its April low at 6,400, resulting in 7,195 – 6,400 = 795 points. Each point move in the E-mini S&P 500 futures contract is 50 USD. Micro E-mini S&P 500 (MES) futures are also available at 1/10 of the standard size.

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¹ Examples cited above are for illustration only and shall not be construed as investment recommendations or advice. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. Please refer to full disclaimers at the end of the commentary.

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