Oil prices rose sharply on Thursday, with Brent crude jumping 3.8% to $104 a barrel, as fears about escalating Middle East tensions and a squeeze on production from a hurricane threat off the US coast triggered a wave of selling in global bond and stock markets.
Middle East tensions fuel supply fears
The White House has asked the Pentagon to draw up options for strikes against Iran before the US midterm elections, according to a report in The Atlantic. The report cited unnamed officials in Donald Trump's administration who said the size and targets of potential strikes, and whether they will go ahead, are still being debated.
The report has weakened hopes that Trump will refrain from escalating the conflict with Iran before the midterm polls next month. A "limited operation" could be followed up by more substantial action after the midterms, it states.
Another wave of strikes against Iran represents further risk to oil supply from the Middle East, with the US-Israeli war against Tehran now entering its eighth month. Attacks on tankers in the Strait of Hormuz reached their highest levels of the war, cutting traffic through the waterway and deepening fears about supply.
The latest attack came on Wednesday, when a tanker was hit by multiple projectiles off the north coast of Qatar, causing casualties, according to the United Kingdom Maritime Trade Operations.
Hurricane threat squeezes production
Oil prices also rose in response to a squeeze on production in the Gulf of Mexico, after the tropical storm Isaias strengthened to become the first hurricane of the Atlantic season. Shell and Chevron both said they were shutting down production as the storm approached the region, forecast to make landfall on Friday or Saturday.
Maersk, the Danish shipping group, added to worries around rising energy prices on Thursday after it said it was increasing its emergency fuel surcharge on all its export collections and import deliveries.
Bond and stock markets sell off
The rise in energy prices has fed fears about inflation, reinforcing expectations that central banks will have to raise their interest rates in order to control rising prices. A sell-off in global bond markets continued on Thursday.
In the UK, the yield on the 30-year gilt – the benchmark for the cost of long-term government borrowing – rose by 3 basis points to 6.0117%, after touching 6.036% on Wednesday, the highest since January 1998. The 10-year gilt yield rose by 5 basis points to 5.48%, approaching the 5.5% mark, returning to levels not seen since July 2007.
In France, which has been hit particularly hard over worries around its rising debt and growing spending, the 10-year yield rose by 6 basis points to 4.931%, just behind the 24-year high of 4.994% it hit last week. The German 10-year yield, the benchmark for European debt, rose by 2 basis points to 3.504%. The yield on the US 10-year treasury, which is widely considered the best quality government debt on the market, rose by 5 basis points to 5.331%.
Global stocks also fell, with Japan's Nikkei share index falling 1.4% and the South Korean Kospi down 2.6%. In Europe, the Stoxx Europe 600, which tracks the biggest companies on the continent, dropped 0.9%. The UK's FTSE 100 slipped by 0.4% in early trading on Thursday.
