Rising oil prices, conflict in the Middle East and political uncertainty in Europe kept investors on edge yesterday, leaving stocks to drift lower ahead of critical US inflation data later this week.
Tehran said it would announce a restricted zone outside the Strait of Hormuz in coming days, after US forces hit three Iranian tankers and Iran’s Islamic Revolutionary Guard Corps launched ballistic missiles at two US Navy ships.
As a result, Brent crude futures rose 1.3 per cent to $97.5 a barrel, the most in seven weeks. The oil price surged almost 8pc last week and is now 35pc above where it was in late February, before the war started.
Prices for diesel, which powers transport, shipping, farming and manufacturing, hit record highs last week and are around 90pc higher than they were prior to the war.
With food and fuel prices rising everywhere, central banks are more likely than not to raise interest rates, making this week’s reading of US consumer prices a key focus for investors.
The European Central Bank is expected to lift rates to 2.5pc on Thursday. Futures imply traders also expect another hike to 2.75pc by December.
Likewise, markets are pricing in a 75pc chance the Bank of Japan will raise rates a quarter point at its meeting on September 18, with a 60pc probability of another move by December.
“Central bank patience through the energy shock has been supportive of asset prices and the credit cycle,” said Bruce Kasman, global head of economics at JPMorgan. “However, central banks are now on the move.”
For the Federal Reserve, last week’s payrolls report, which blew past expectations with a rise of 162,000 in August, has left markets pricing a 58pc chance of a hike when it meets on September 16, and 70pc for a move in October.
With an ECB hike all but in the bag, the euro rose 0.14pc to $1.1629. It has drifted lower since hitting three-month highs in August and, with political friction mounting on multiple fronts, may struggle to get much upward momentum, analysts said.
The euro has fallen 1.1pc this year, making it the weakest performing major currency against the dollar, compared with a modest 0.7pc gain in the Japanese yen, which has been partly boosted by official intervention, and a 0.4pc rise in the pound.
The dollar retreated against the yen, falling 1.2pc to 154.32, as a burst of buying propelled the Japanese currency to a seven-month high. The Japanese currency posted its strongest weekly performance in a month last week, as mounting expectations for the BoJ to hike rates, along with the ongoing threat of more official buying, triggered a short squeeze.
Meanwhile, European stocks struggled into positive territory, while on Wall Street, a US holiday kept turnover light with S&P 500 futures down 0.2pc and Nasdaq futures up 0.2pc.
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