Rising energy prices have increased inflation expectations, and markets have started to price in a higher probability that US interest rates may be raised once again this year. This strengthened the dollar, while stock indices on both sides of the Atlantic fell slightly.
Read more Inga Ruginienė: There are no sensitive issues in the Istanbul Convention that are often talked about
Energy prices rise for the second week in a row
The situation in the Middle East continued to escalate. US forces struck Iran for the thirteenth consecutive night, while Iran-linked Houthi forces in the Red Sea attacked two Saudi Arabian oil tankers. This route is currently the main alternative oil export path while shipping through the Strait of Hormuz is disrupted. Additionally, following the tanker attacks, the Caspian Pipeline Consortium halted loading at its Black Sea terminal – cutting about 80% of Kazakhstan’s oil exports.
Midweek, Brent prices rose above $100 per barrel but fell about 4% on Friday after reports emerged that Pakistan, backed by China, is seeking to renew US-Iran negotiations. Friday’s pullback indicates that markets are currently pricing in the risk of supply disruption rather than an actual supply reduction.
A more important change for the eurozone was in the natural gas market. TTF gas prices rose to €63.58 per megawatt-hour and are now more than 45% higher than at the beginning of July. Several factors contributed: reduced liquefied natural gas supplies from the Persian Gulf forced European buyers to compete more sharply with Asian countries for available cargoes, unusually hot weather increased electricity demand, and Europe’s largest gas supplier Equinor warned that the region is unlikely to reach the 80% storage fill target before the heating season. Rising gas prices directly increase eurozone energy inflation and industrial costs.
Markets increasingly expect higher US interest rates
Rising energy prices have increased inflation expectations, leading markets to price in a significantly higher probability that the US Federal Reserve will raise interest rates again this year. The yield on two-year US government bonds – the market indicator most sensitive to central bank policy expectations – reached its highest level in about 17 months.
This revision of expectations strengthened the US dollar: the euro weakened 0.5% against the dollar to 1.1377. A stronger dollar and higher interest rate expectations are unfavorable for most other asset classes, so most other market moves this week were driven by the energy price surge.
Stock markets fell slightly, while precious metals rose despite a stronger dollar
US stock indices declined moderately. The technology sector index Nasdaq Composite fell 1.5% and was the worst-performing index, but this was driven more by corporate earnings than energy prices. Alphabet increased its investment plan for this year to $205 billion, while Tesla shares dropped sharply after a disappointing quarter. This renewed discussions about whether investments in artificial intelligence are growing faster than their returns. The S&P 500 index fell 0.7%, and the small-cap Russell 2000 index also declined by the same amount.
Read more Two earthquakes recorded in a remote province of China
European indices declined less: Euro Stoxx 50 fell 0.3%, Germany’s DAX 0.3%, France’s CAC 40 0.5%. Spain’s IBEX 35 was the only major index to rise – it increased 0.3%. This may have been influenced by a higher share of banks and energy companies in the index, as these sectors typically perform better when both interest rates and energy prices rise.
Precious metal prices rose despite the stronger dollar, which is usually unfavorable for them. Silver prices increased 4.7% to $58.66 per ounce, gold rose 1.4% to $4,067.60. Midweek, prices of both metals had fallen due to rising interest rate expectations, but recovered by the end of the week as the technology sector sell-off increased demand for safer haven assets.
This week’s market focus
The most important event is the US Federal Reserve meeting on Wednesday. Interest rates are expected to remain unchanged at 3.75%, so the main focus will be on the bank’s statement and press conference, especially whether higher oil and gas prices have changed the central bank’s assessment of inflation prospects.
On Thursday, eurozone second-quarter GDP data will be released. The economy is forecast to have grown 0.2%, following a 0.2% contraction in the previous quarter, so a return to moderate growth is expected. Germany’s economic growth is thought to have slowed to 0.1%, France’s accelerated to 0.2%, and Spain maintained a relatively brisk 0.6% growth. The US is forecast to have 2.3% annual economic growth in the second quarter, and the core PCE price index – the Federal Reserve’s most closely watched inflation measure – is expected to rise 0.1% monthly.
The most important data of the week will be released on Friday – July eurozone inflation. It is forecast to have increased from 2.8% to 2.9%, with core inflation remaining at 2.4%. This will be the first clear signal of how quickly rising energy prices are passing through to consumer prices.
The week began with Monday’s release of Germany’s Ifo business climate index. Economists expected a slight improvement to 86.1 points – an early indicator showing how German companies are adapting to the energy price shock.
Read more Painful loss in the medical community: longtime surgeon at Kaunas hospital has died
