New tension over Hormuz sharply increased oil and gas prices
Renewed military actions in the Hormuz Strait region increased the price of Brent crude oil by 8.65% to 104.61 USD per barrel. On Thursday, it briefly rose above 108 USD, reaching the highest level in four months. TTF – the European natural gas benchmark price – rose 10.52% to 79.52 EUR per megawatt-hour, marking the fifth consecutive week of growth and the highest level since December 2022.
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Saudi Arabia, aiming to protect against possible attacks on energy infrastructure, temporarily suspended the operation of the main east-west oil pipeline. About one-fifth of global liquefied natural gas (LNG) supplies, mainly from Qatar, remain disrupted, and European gas storage is filling more slowly than usual ahead of winter.
On Friday, oil and gas prices fell slightly after Iran announced planned meetings in Oman with Persian Gulf states regarding shipping route security. However, the week ended with significantly higher prices for both commodities.
Central banks’ reaction: ECB raises interest rates, Fed decision ahead
The European Central Bank on Thursday raised the deposit interest rate by a quarter percentage point to 2.50%. This is the second rate hike since the conflict began. ECB President Christine Lagarde highlighted the increasing inflation risks and weakening economic growth prospects. Although the ECB did not change its 2026 inflation forecast, keeping it at 3%, the bank raised inflation forecasts for the following two years and improved GDP growth forecasts for 2026 and 2027. This indicates that the ECB views the eurozone economy’s resilience to external shocks quite positively.
During the press conference, the ECB emphasized the risk that higher energy and production costs could pass through to prices of other goods and services. However, so far, no data show so-called second-round effects. Core inflation, excluding energy and food prices, was 2.4% in August, and according to ECB forecasts, it should stabilize around 2.5-2.6% in the coming years.
The interest rate hikes, together with oil prices rising above 100 USD, have prompted investors to reassess how much further the ECB can tighten monetary policy. Futures markets currently price in one or two additional rate hikes by the end of this year and up to three more hikes by mid-next year. In that case, the ECB deposit rate would reach about 3.25%.
In the United States, investors this week began to view a Federal Reserve (Fed) rate hike as almost inevitable. These expectations were reinforced by higher-than-expected producer price growth in August and consumer price data released on Friday showing 3.4% annual inflation.
Bond yields rose on both sides of the Atlantic: the US 10-year bond yield approached 5%, while the yield on comparable German bonds remained near multi-decade highs.
US inflation continues to be driven by energy
US consumer prices rose 0.4% month-on-month in August, but most of this increase was due to higher energy prices. Core inflation, excluding food and energy, rose more modestly by 0.3% month-on-month and 2.4% year-on-year, the lowest annual rate since March 2021, indicating that the energy price shock has not yet reached the rest of household spending.
Oil prices on world markets have risen sharply since August and are currently on average about 15% higher than at the end of summer. Analysts surveyed by Bloomberg expect US inflation to remain near the current level until the end of the year and then gradually decline, averaging about 2.4% in 2027.
Stock markets pressured by energy price surge and interest rate outlook
Stock markets fell for four consecutive trading sessions and only recovered on Friday when oil prices eased slightly. Europe suffered the largest losses. Germany’s DAX 40 index fell 1.83% over the week, France’s CAC 40 by 1.20%, and the Euro Stoxx 50 and Spain’s IBEX 35 by 1.06% each. European markets reacted more sensitively due to greater dependence on imported energy resources and rising borrowing costs.
In US markets, the decline was more moderate: the S&P 500 fell 0.80%, and the Nasdaq Composite 0.66%. Large technology companies remained fairly resilient. Meanwhile, the small-cap index Russell 2000 dropped 2.41% – the weakest weekly performance, as smaller domestic market companies are more sensitive to interest rates.
Gold and silver do not follow the usual pattern
Precious metals reacted differently than usual during this period of geopolitical uncertainty. Gold prices fell 1.44% to 4,366.20 USD per ounce, and silver dropped 2.26% to 64.55 USD. This is the third consecutive week of price declines for both metals. Since neither gold nor silver generates interest, rising bond yields make them less attractive to investors. Silver prices were additionally pressured by its greater dependence on industrial demand and the risk of slower economic growth.
The euro exchange rate against the US dollar remained essentially unchanged, ending the week at 1.1592 USD per euro, down just 0.26%.
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Eurozone industry started the third quarter weakly, but sentiment is improving
In July, Germany’s industrial production volumes fell 2.3% compared to June, reaching the lowest level since 2020. The fastest contractions were in automobile, clothing, and wood product manufacturing, but computer and electronics production continued to grow.
In France, production volumes also declined for the third consecutive month, but monthly growth was recorded in Spain, Italy, and Ireland. Year-on-year, production volumes were still falling in Germany, France, and Italy.
Despite weak July results, manufacturers’ expectations in Germany and across the eurozone rose in August to the highest level since spring 2022. This signals better short-term sector prospects. However, high fuel prices and recently increased gas prices in Europe may dampen this optimism in the coming months.
This week’s market focus
The main event this week is the Federal Reserve decision on Wednesday. Markets expect a quarter percentage point increase to 4.00% from 3.75% – the first hike in this cycle, and the Fed will also release updated economic forecasts at the meeting. With August inflation at 3.4% and producer prices exceeding 5%, markets are more focused on how much further the Fed plans to raise rates in the future rather than whether it will raise them at all.
In the eurozone, the main focus will be on whether economic confidence indicators remain resilient to the energy price shock. On Tuesday, the ZEW investor expectations survey results will be published – a closely watched indicator of financial market professionals’ expectations. The index is forecast to rise to 42.7 points in Germany from 34.2 points, and to 39.9 points across the eurozone from 31.4 points. At the same time, Germany’s current economic situation assessment, although still very negative, is expected to improve to –53.0 points from –61.1 points.
On the same day, final August inflation data will be released for France, where 0.7% monthly price growth is expected, and Spain, where annual inflation is likely to be confirmed at 4.5%. This would be the highest inflation rate among the major eurozone countries.
On Wednesday, eurozone second-quarter wage growth data will be published. The previous figure was 3.4%, and the ECB closely monitors this data to assess whether rising energy prices are starting to be reflected in wage agreements.
Also on Wednesday, July eurozone industrial production data will be released. Production is forecast to have fallen 0.5% compared to June, after no change in June. This would confirm that the manufacturing sector is losing momentum.
On Thursday, it should be confirmed that annual inflation in the eurozone in August was 3.3%, and core inflation 2.4%. On Friday, German producer price data will be published. They are expected to have risen 0.6% month-on-month, after 1.1% growth in July. This would indicate that the impact of energy prices continues to pass through supply chains into production costs. No significant economic indicators are scheduled for release in Italy this week.
In the United States, besides the Fed decision, August retail sales data will be released on Wednesday. Retail sales are forecast to recover and grow 0.8%, after a 0.6% decline the previous month. This would indicate that consumer demand is currently successfully absorbing higher fuel prices.
It is also expected that two regional manufacturing activity indicators will decline from previously recorded high levels. The New York regional manufacturing index is expected to fall to 14.1 points on Tuesday from 20.6 points, and the Philadelphia regional index to 28.9 points on Thursday from 47.4 points.
Import price data will be released on Wednesday, and industrial production data on Friday, showing how much the rise in energy prices has already passed through to goods prices and production volumes in the US economy.
