Euro zone bond yields edged higher on Wednesday as oil prices climbed, following dramatic swings over the re-escalation of conflict in the Middle East and the release of U.S. inflation data. According to The Economic Times, Germany's 2-year bond yield was last up 3 basis points at 2.7552%, while Germany's 10-year bond yield, the euro area's benchmark, rose 3 basis points to 3.099%. The yield, which is sensitive to central bank rate expectations, had risen as much as 8 basis points on Tuesday to a two-year high as oil prices jumped on the U.S.-Iran conflict, before falling sharply after U.S. inflation data came in weaker than expected and ending roughly flat on the day.
Oil prices rose on Wednesday, with Brent crude up 0.8% at $85.40 a barrel, as the U.S. and Iran continued trading strikes. According to The Economic Times, a jump in oil prices over the last week has seen traders sharply raise their bets on ECB rate hikes this year, but they wound them back in somewhat after the U.S. CPI inflation data. The surge in oil prices may also lift energy stocks, while companies with high fuel and transportation costs could face margin pressures if crude prices remain elevated. After President Trump announced the end of the ceasefire with Iran, WTI crude oil prices spiked into the mid-US$70s before slightly pulling back and equity markets sold off. The geopolitical shift propelled the energy sector to lead the TSX, while the information technology sector led the S&P 500, with energy following closely behind.
Money markets were pricing in 40 basis points of further ECB tightening this year, up from 30 basis points a week ago but down from a peak of 48 basis points on Tuesday, as reported by The Economic Times. The jump in oil prices over the last week has seen traders sharply raise their bets on ECB rate hikes this year, but they wound them back in somewhat after the U.S. CPI inflation data. Data on Tuesday showed headline U.S. inflation slowed more than expected to 3.5% year-on-year in June, down from 4.2% in May, although the fall was largely due to a drop in energy prices which is now under threat. The renewed geopolitical tensions triggered a rally in crude oil prices, raising concerns that higher energy costs could keep inflation under pressure.
Iran's Islamic Revolutionary Guard Corps has threatened to close other export corridors, Iranian media reported, in a possible sign it could use its Houthi allies in Yemen to shut the Bab el-Mandeb gateway to the Red Sea, putting two of the world's most vital energy arteries at risk. According to The Economic Times, the threat comes as the U.S. military carried out a third consecutive night of strikes against Iran on Monday, as President Donald Trump reinstated a blockade of Iranian shipping and proposed charging a 20% fee to guard the Strait of Hormuz. The surge in oil prices may also lift energy stocks, while companies with high fuel and transportation costs could face margin pressures if crude prices remain elevated.
