Gulf conflict drives oil above $90, reigniting inflation fears and bond market volatility
Brent crude and European gas benchmarks surge as US Treasury yields climb, prompting expectations of further interest rate hikes from the Federal Reserve and the European Central Bank.
Escalating military conflict in the Gulf has driven Brent crude above $90 a barrel for the first time in more than a month, while European gas benchmarks reached €60.00 per megawatt hour. The surge in energy costs follows the ninth consecutive night of US military strikes on Iran and Iranian threats to close the Strait of Hormuz, a critical maritime chokepoint. Although US Central Command denied the waterway was fully closed, noting that commercial ships continued to transit, the threat has significantly disrupted trade flows and fuelled inflation concerns.
The spike in fuel prices has revived worries about persistent inflation, despite recent US consumer price data surprising on the downside. Consequently, futures markets are now pricing in at least one Federal Reserve rate hike by year-end. This expectation has pushed US Treasury yields higher, with the benchmark 10-year yield at 4.55% and 30-year yields reclaiming the psychological 5.0% barrier. These elevated yields tend to attract capital away from equities and raise the valuation hurdle for corporate earnings.
Money markets are similarly pricing in further tightening from the European Central Bank, with traders assigning an 80% probability of a rate move by year-end. The policy-sensitive German two-year yield rose to 2.817%, its highest level in two years. Shane Oliver, head of investment strategy at AMP, warned that if the strait remains closed and the war escalates, oil prices could theoretically need to rise to $150 a barrel to curb demand, describing this as a high-risk scenario.
Equity markets remained cautious as investors digested the macroeconomic backdrop and awaited major technology earnings. Europe’s broad index finished flat, while Asia-Pacific shares dipped 0.3%, with South Korea’s chip-heavy market losing 4.1%. The Philadelphia Semiconductor Index has fallen 20% from its June record high, reflecting concerns over high valuations and recent volatility. Investors are now focused on quarterly results from Alphabet, Intel, and Tesla, which are expected to provide clarity on the artificial intelligence trade.
In currency markets, sterling rose against the dollar and euro following the announcement that Andy Burnham would become Britain’s seventh prime minister in a decade. The pound gained 0.17% to $1.3475, as traders unwound short positions amid a relatively smooth leadership transition. Meanwhile, precious metals and other major currencies remained muted, with spot gold holding steady at $4,019 an ounce and the Japanese yen flat at 162.36 per dollar.
