Trump’s apparent about-face on Monday not only calmed oil prices but also the complex of world stocks and bonds that had shivered after oil's triple-digit price spike. Wall Street stocks closed up on Monday, while on Tuesday South Korea’s KOSPI index regained nearly 6% and Japan’s Nikkei climbed nearly 3%.

Meantime, U.S. Treasury yields tumbled and the dollar took a breather on Tuesday, steadying against major currencies, helping gold edge up in turn. U.S. stock futures were up ahead of the bell, having remained remarkably calm amid yesterday's tumult.

Many will say this is the TACO (“Trump always chickens out”) trade par excellence, but there are few signs that Trump’s optimistic turn is playing out on the ground, with Iran’s Islamic Revolutionary Guard Corps still asserting that no oil will be exported as long as U.S.-Israeli attacks continued.

Responding to that over social media, Trump threatened further retaliation against Iran if it continued to disrupt oil flows through the Strait of Hormuz. So, for now, the tit-for-tat looks set to continue.

Through all of this, oil prices held above $90 per barrel - a level that would have seemed frightening only last month. And pass-through to fuel costs is already being felt in the U.S., where a comfortable majority of Americans now believe prices will worsen over the next year.

In the background, G7 finance ministers on Monday mulled a possible joint release of their oil reserves to calm the horses, though they stopped short of doing so now, with a G7 official telling Reuters that the decision was “just about timing”.

Elsewhere, China reported a spectacular surge in its trade surplus for the first two months of the year, with exports up more than 20% year-on-year. While that certainly supports its new growth target of just under 5% and comes despite falling bilateral trade with the U.S., it also predates this month’s spike in oil prices.

Later in the day, after the bell, Oracle is set to report earnings, with traders likely to be on the lookout for signs of a payoff from spiralling capex as it ploughs billions into AI data center expansion.

With that, onto today's column.

Central banks are clearly watching the Iran war oil shock like hawks. But even if inflation is their main concern, it's not the only one - and a worst case for some top policymakers is that the crude price surge proves a breaking point for multiple financial stress fractures.

The surge in oil prices, driven by supply disruption from more thana week of war in the Middle East, is already challenging central banks' stretched mandates.

An age-old question is whether oil spikes that lift inflation and inflation expectations ultimately crimp household and business finances so much that they depress demand and prices. And then there's the toxic scenario in which they do both, leaving policymakers with ‌a conundrum of whether to prioritize taming inflation or supporting consumers and jobs.

Graphics are produced by Reuters.