Oil rises again as Mideast tensions worsen, euro firms ahead of ECB

Grim picture in Middle East stokes inflation fears

Far from returning to the negotiating table, the United States and Iran exchanged fire for a twelfth night in a row, as President Trump made fresh threats against Tehran, while Houthi rebels in Yemen struck Saudi tankers in the Red Sea. Fighting continues to rage across the Middle East, spreading as far as the Red Sea after Iran-backed Houthi rebels raised the stakes by imposing their own blockade of Saudi ships passing along the Bab al-Mandab Strait.

This escalation that threatens oil supplies in the second most important chokepoint in the region is fuelling oil prices higher. Brent crude futures are up by over 10% this week, while WTI futures have gained more than 8%, heightening concerns about renewed inflationary pressures.

With more oil tankers burning in the Strait of Hormuz and the Houthis attacking two Saudi tankers in the Red Sea, Trump is more likely to step up the strikes against Iran rather than agree to a new round of ceasefire talks. Posting on his Truth Social platform on Wednesday, Trump warned Iran that the US will bomb “one bridge or power plant” every time Tehran shoots at a ship in the Hormuz Strait.  

Trump’s military campaign against Iran received a boost from Congress yesterday after the Republican-controlled House initiated the process for a budget reconciliation bill that would include $95 billion in funding for the war.

Yields jump as euro braces for hawkish ECB tilt

Unsurprisingly, the mood in the markets is very mixed today, primarily because bond yields are extending their monthly uptrend, as inflation risks are front and centre again. The 10-year US Treasury yield is fast approaching its May peak of 4.687%, with French and German equivalents even surpassing their May highs.

The European Central Bank concludes its two-day monetary policy meeting later today and is expected to announce its decision at 12:15 GMT, with no change anticipated. Before this latest re-escalation, there was a growing probability that the ECB wouldn’t have to hike rates beyond June’s increase, but the constantly shifting geopolitical landscape has upended those bets.

Investors have priced in more than an 85% probability that the ECB will deliver its second 25-bps hike in September.

Hence, the market reaction today will depend on how strongly President Lagarde will signal such a move in her press briefing. The euro is headed higher for a second session on Thursday, climbing above $1.1420 from yesterday’s lows just below $1.1400.

Aussie lifted by jobs data, pound traders assess Burnham policies  

The Australian dollar is also trading marginally higher versus the greenback after receiving a lift from stronger-than-expected employment numbers out of Australia. The odds of additional tightening by the Reserve Bank of Australia went up after the data, although a 25-bps increase isn’t fully priced in until the December meeting.

The pound, meanwhile, has been somewhat underperforming this week as investors have yet to be convinced by new Prime Minister Any Burnham’s pledge to stick to Labour’s existing fiscal commitments, while yesterday’s CPI report dented BoE rate hike bets. Just days into the job, Burnham has already announced several giveaways to households and businesses, most of which will be funded by savings from elsewhere.  

However, today’s announcement for a 20% cut in business rates for pubs, clubs and music venues is a bit more worrisome for the markets as it will be paid for by yet unsecured funding.

Yen resumes slide, gold pulls back

The US dollar has been having a mixed week amid the varying degrees of ratcheting up of tightening expectations for the major central banks. For the Fed, September is back in the spotlight for a likely rate hike and the greenback has been having a positive week against a basket of currencies, particularly versus the Japanese yen.

The yen hit a fresh 40-year trough on Tuesday and is plunging again today, reaching a new low of 163.44 per dollar and sparking more verbal intervention by Japan’s finance minister, Satsuki Katayama.

The absence of any action thus far suggests Japanese authorities are not too alarmed by the pace of the latest slide, though that doesn’t mean that intervention isn’t possible as near as the 163.50 level.

The dollar’s rebound this week has finally caught up with gold, which had managed to stage its own impressive recovery until yesterday. The precious metal is retreating from Wednesday’s two-week high of $4,166, slipping towards $4,090.

Tech earnings fail to impress but chips gain

In equity markets, Asian stocks are shrugging off Wall Street’s overnight losses and are being led higher by a rebound in chip stocks. The persistent upside pressure on oil prices seems to have spooked Wall Street traders, but e-mini futures suggest the recovery in Asia is not broadening, with European shares also in the red today.

Shares in Tesla and Alphabet fell in after-hours trading after the two Magnificent Seven giants unveiled their latest quarterly results. Tesla’s stock is down more than 5% following its massive EPS miss, even as cash flow didn’t decline as much as feared. Alphabet on the other hand was unable to impress investors with its 82% y/y jump in cloud revenue as the Google owner raised its forecast for 2026 capex again.

Investors have clearly set the bar much higher this earnings season and are not in a very forgiving mood, mainly as the ongoing conflict in the Middle East is adding to worries about the outlook.

Having said that, it’s still very much a picture of rotation back and forth between the AI hyperscalers and enablers. Korean chip giants, SK Hynix and Samsung, are benefiting from Alphabet’s increased AI spending, although the same cannot be said for Texas Instruments, whose earnings beat was overshadowed by higher capex forecasts.

AMD’s stock is also up in pre-market as the company has signed a strategic partnership with AI firm, Anthropic. Later in the day, Intel’s earnings will be watched by investors.