Key facts
- Oil and gas prices surged due to escalating conflict in the Gulf.
- Brent crude exceeded $90 a barrel, and European gas prices hit €60.00.
- Higher energy costs revived inflation fears, leading to increased bond yields.
- U.S. 10-year Treasury yields reached 4.55%, and 30-year yields surpassed 5.0%.
- Markets are pricing in potential Fed rate hikes by year-end.
- Major tech earnings from companies like Alphabet and Tesla are expected this week.
The escalating conflict in the Gulf has driven oil and gas prices higher, reigniting inflation fears and creating volatility in bond and stock markets. Brent crude climbed above $90 a barrel for the first time in over a month, while European benchmark gas prices reached €60.00 per megawatt hour, driven by ongoing attacks and transit issues in the Strait of Hormuz.
These rising energy costs have revived concerns about inflation, even after recent U.S. consumer price data surprised on the downside. Consequently, futures markets are now pricing in at least one Federal Reserve rate hike by the end of the year. This outlook has pushed U.S. Treasury yields higher, with the 10-year yield at 4.55% and the 30-year yield back above 5.0%. The policy-sensitive German 2-year yield also hit a two-year high of 2.817%.
The higher yields and energy prices are putting pressure on equity markets. Europe's main index was flat, with gains in energy stocks offsetting losses elsewhere. U.S. futures showed slight gains, while the MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.3%, with South Korea's chip-heavy market experiencing a significant decline.
Investors are also scrutinizing the high valuations of chip and AI stocks, with the Philadelphia Semiconductor Index shedding 10% last week. The recent announcement of a new AI model by Chinese firm Moonshot adds another layer of complexity.
This week's packed earnings calendar, featuring tech giants like Alphabet, Intel, and Tesla, is expected to further test the artificial intelligence trade. Analysts at BofA anticipate a strong earnings beat, with technology and semiconductors expected to drive significant growth.
In currency markets, sterling saw gains against the dollar and euro, attributed to a swift and relatively drama-free leadership transition in the UK. British gilts, however, slightly underperformed their European counterparts.