Geopolitical Tensions Drive Oil Price Surge And Heighten Investor Concerns Across Global Markets

Source: Reuters.

The rise of global oil benchmark Brent crude futures to more than $126 before falling back, and an early drop in European stocks, reflected concerns that a prolonged conflict in the Middle East could choke oil supplies for months.

A hawkish shift in tone from the US Federal Reserve as it left rates on hold on Wednesday meant bond market borrowing costs were still higher in Europe as investors there readied for the ECB and the BoE to follow suit on Thursday.

Two-year German bond yields - which are sensitive to near-term ECB rate changes - faced the prospect of a ninth daily rise, while two-year UK gilt yields briefly hit their highest in two and a half years.

Axios says Trump to be briefed

Axa's chief economist, Gilles Moec, said everything centred on worries about the US-Israeli war against Iran.

News site Axios quoted unspecified sources as saying US President Donald Trump would on Thursday receive a briefing from the leader of the US Central Command, ​Brad Cooper, on new plans for potential military action against Iran.

Negotiations have stalled and Axios said Washington hopes ⁠to make Iran more flexible at the negotiating table on nuclear issues.

Investors are concerned that a prolonged conflict will drive up pump prices and could even drive economies towards recession.

"The inflation shock is significant and probably going to last longer than expected and at the same time the damage to the economy is going to be higher," Moec said.

"This is playing into the hands of the hawks," he said, referring to central bankers calling for higher interest rates to prevent further inflationary problems.

Brent crude futures were up almost 3% at $122 a barrel in European trading after hitting $126.41 overnight, the highest since March 2022. Brent has now more than doubled in price this year.

The US dollar, which has been a favoured safe-haven play since the war began on 28 February, climbed to its highest level in more than two weeks against a basket of top currencies.

Japan's yen also breached the key 160 threshold, stoking renewed speculation of a possible FX intervention by Tokyo after its repeated verbal warnings.

The Japanese currency has fallen more than 2% since the war began and investors have built the biggest short yen position in nearly two years in a bet that neither rate hikes nor intervention warnings will come to its rescue.

Overnight, the yield on 10-year Japanese government bonds had climbed to 2.5%, the highest since June 1997.

Eyes on Apple

Investors were also gearing up for earnings from iPhone maker Apple later as part of what has already been a frenetic week of 'Big Tech' reports.

Google parent Alphabet's shares had leapt 7% in extended Wall Street trading on Wednesday after it beat forecasts. Microsoft and Amazon's were also solid although Facebook and Instagram owner Meta tumbled 7% on its plans to plough billions more into AI and datacentres.

Europe's attention was now on what the ECB and BoE will signal, especially after Wednesday's shift in tone at the Fed.

Three of the US central bank's board members voted to drop the easing bias in its policy statement in the most divided decision since 1992.

Outgoing Chair Jerome Powell confirmed he would stay on as a governor for now to defend the institution's independence as his successor Kevin Warsh, picked by low-rate advocate US President Donald Trump, moves toward confirmation.

Laura Cooper, global investment strategist and head of macro credit at fund manager Nuveen, said the BoE meeting would be watched particularly closely, as markets have been pricing in multiple rate increases when it is over.

"The UK is so interesting to me in the sense that we see that as probably among the greatest mispricings in markets right now," Cooper said, explaining that she expected a very different picture to play out given the likely hit to the UK economy.

"We think the BOE will have to cut; their next move will be a rate cut, probably not until Q4."