Markets began the week celebrating a geopolitical breakthrough before shifting their attention back to the one force that ultimately drives asset prices: central bank policy.

The reopening of the Strait of Hormuz initially sparked a powerful risk-on rally, easing concerns around energy supplies and inflation. However, by Wednesday, investors were focused on a far less comfortable question.

What if the next move from the Federal Reserve is up rather than down?

The week started with a major shift in sentiment.

A breakthrough agreement between the United States and Iran paved the way for the reopening of the Strait of Hormuz, helping ease fears of a prolonged energy shock.

• The S&P 500 gained 1.7%
• The Nasdaq 100 surged 3.1%
• The Dow Jones reached a record high
• Oil fell below $81 per barrel
• Bitcoin climbed above $66,000

The move reflected growing confidence that global energy supplies would normalise and that inflation pressures linked to the conflict could begin to fade.

Despite the strong start, market leadership continued to evolve.

Technology and semiconductor stocks, which have driven much of the rally over recent months, began to lose momentum as investors rotated into more economically sensitive sectors.

• The Dow Jones reached another record high
• The Nasdaq 100 fell around 2%
• Semiconductor stocks came under pressure
• Oil dropped below $80 per barrel

This suggests capital is not leaving equities, but is becoming more selective about where it is deployed.

By Wednesday, the focus shifted entirely to monetary policy.

The Federal Reserve left interest rates unchanged, but markets interpreted the updated projections as significantly more hawkish than expected.

• The S&P 500 fell 1.2%
• Two-year Treasury yields surged
• The dollar strengthened
• Markets moved to fully price a rate hike by October

New Fed Chair Kevin Warsh repeatedly emphasised price stability and dismissed any discussion around changing the Fed's 2% inflation target.

While policymakers remain divided, the message was clear: inflation remains the primary concern.

• Geopolitics → Oil → Inflation expectations → Central bank policy → Yields → Equity leadership

• The Hormuz agreement has reduced immediate energy risks
• Oil prices are easing
• Technology leadership is broadening into other sectors
• The Fed is becoming more focused on inflation than growth
• Markets are beginning to price the possibility of further tightening

The geopolitical shock may be fading.

The monetary policy challenge is not.