US Secretary of War Pete Hegseth used a Senate Appropriations hearing to press for an immediate funding injection and a much larger long-term defence budget, requesting a $67 billion injection.

This poses a few questions for traders:

• Is the US preparing for a prolonged conflict with Iran over the Strait of Hormuz?
• Is this an indication of willingness for war, rather than for deescalation?
• Will the markets buy the story of “Escalate to deescalate” longer?

The $67b request includes $21.3 billion for readiness and $45.9 billion for capabilities such as munitions, drones, satellite networks, advanced computing and cyber defence.

Hegseth said the supplemental was not a replacement for the administration’s separate $1.5 trillion fiscal-year 2027 base request. The department says $756.8 billion would go towards new capabilities and the defence industrial base.

Markets may naturally read that as supportive for contractors. Multi-year procurement can improve production visibility and give suppliers more reason to expand capacity.

ITA Defence ETF is Gapping Up

ITA rejected the 245.88 to 250.58 resistance zone after forming a bearish momentum divergence. It then lost 233.78 to 236.60 and moved towards support at 225.99 to 227.26. However, after Hegseth’s statements, the ITA ETF appears to be gapping up.

The daily stochastic is near 1.9, making the ETF deeply oversold.

A short-term reaction is possible, but the first meaningful confirmation would be a recovery above 233.78 to 236.60. Below 225.99, the next support area is 209.31 to 218.50.

The relative chart is stronger

ITA divided by the S&P 500 is holding around 0.0296 and its rising 100-week EMA band (0.50 standard deviation). That suggests defence can outperform the wider market even if the ETF itself struggles to rally.

A weekly break above 0.0333 would strengthen the relative trend. Losing 0.0296 and the EMA band would weaken it.

The budget story has made defence worth revisiting, but price has not confirmed a clean breakout. ITA still needs to reclaim broken support, while ITA/SPX currently offers the stronger signal.

Oil is keeping the inflation risk alive

The defence spending story is not happening in isolation. Oil has also moved sharply higher as the conflict has intensified.

WTI has risen to the 90’s and hit its bull flag target, formed during mid July around 11th-17th.

As war concerns rise, so does the markets’ anticipation of tightening oil supply.

Higher oil can feed directly into inflation expectations, and if energy prices stay elevated, markets may become less confident that the Federal Reserve can ease policy, keeping pressure on long-term Treasury yields.

This creates a mixed backdrop for defence shares. Larger military budgets may support orders and production, but higher oil and borrowing costs can still limit how much investors are willing to pay for those future earnings.

In summary, oil can keep treasury yields higher, while the outlook for the Strait of Hormuz returning to normalcy grow even more fragile.