Oil and gas prices have surged, and market expectations for interest rate hikes in Europe have intensified following a third consecutive night of US military strikes against Iran. Brent crude, the international benchmark, rose as much as 4.6% to $87.08 a barrel on Tuesday, its highest level in over a month.
The price had already climbed 10% on Monday after Donald Trump announced a blockade of Iranian shipping. The latest US strikes pushed levels even higher on Tuesday, stoking fears of sustained upward pressure on energy costs and inflation.
Gas prices and borrowing costs also rise
European natural gas prices jumped, with the Dutch TTF contract for August delivery up nearly 3% to €52.8 per megawatt hour, the highest since early April. The UK natural gas contract for August delivery rose 3.3% to 128.27p per therm, the highest in more than three months.
Higher energy prices have reignited inflation concerns, leading financial markets to price in a quarter-point interest rate rise by the Bank of England by September, followed by another before year-end. Traders also forecast a quarter-point rate hike by the European Central Bank in September and another by December. At the start of the month, swaps had priced in less than a quarter-point rise for both central banks, when a fragile ceasefire between the US and Iran was in place.
Trump announces fees on Strait of Hormuz transit
Trump stated that the Strait of Hormuz would remain open "with or without Iran," but the US would impose fees on ships transiting the waterway. A 20% fee would be levied "for any and all costs necessary" to provide security and safety for vessels. This apparent policy reversal has fueled fears of further upward pressure on oil prices, which could contribute to higher inflation.
Oil was trading at $72.48 a barrel before the US-Israeli strikes on Tehran in late February and reached highs of $120 in April. Kathleen Brooks, research director at broker XTB, noted that the last blockade of the Strait of Hormuz, through which a fifth of the world's oil supply normally passes, lasted over 60 days. "The prospect of more fighting and a fresh blockade has meant that traffic through the strait has slowed to a near halt," she said. "Only six cargo ships traversed the strait on Sunday, which is a trickle compared with previous flows in recent weeks. When the supply chain gets gummed up, this is what keeps upward pressure on the oil price."
Stock markets fall amid rate hike expectations
UK government bond yields rose to their highest level since May, with the 10-year gilt yield up five basis points to 5.02%. The two-year gilt yield, particularly sensitive to interest rate expectations, jumped eight basis points to 4.45%, the highest since 19 May.
Stock markets declined on Tuesday. The UK's FTSE 100 index slipped 0.4%, despite gains in oil majors BP and Shell, which rose 2.4% and 1.7%, respectively. The Stoxx Europe 600 dropped 0.5%. In Asia, stocks were mixed, with South Korea's Kospi and Japan's Nikkei 225 both up 0.7%, while China's Shanghai Composite rose 1.4%, supported by a rebound in technology shares.
