Markets could probably have done with a quieter start to the week.
Instead, oil is back above $107 a barrel, Asian tech stocks are under pressure and investors are heading into a run of central-bank meetings that could materially reset expectations for interest rates.
Brent crude was trading around $107.8 a barrel this morning, with US crude near $102.9, after renewed disruption around Middle East shipping routes pushed energy prices higher again. The latest move follows attacks affecting Saudi energy infrastructure and continued uncertainty around the Strait of Hormuz and Bab el-Mandeb, both critical routes for global oil flows.
That is certainly awkward timing for central banks.
The Federal Reserve meets on Wednesday, the Bank of England follows on Thursday and the Bank of Japan rounds things off on Friday – all while markets are having to rethink how quickly inflation can come down if oil remains above $100.
Asia starts the week on the back foot
Asian equities were broadly lower overnight, with technology and AI-linked stocks taking the brunt of the selling.
Japan’s Nikkei fell around 1%, South Korea’s KOSPI dropped about 3.2%, while the broader MSCI Asia-Pacific index outside Japan also moved lower. Chinese equities were weaker too.
The pressure on tech followed renewed concern around the pace of AI development, which weighed on some of the region’s largest technology names.
US futures were pointing lower before the European open, with S&P 500 futures down around 0.5% and Nasdaq futures around 1.3% lower. European futures were also softer, although the FTSE was proving more resilient than some continental peers.
Oil is running the show…again
For now, oil is probably the market that matters most.
Brent has pushed back above $107 after gaining more than 8% last week, and supply risks are becoming increasingly difficult for markets to ignore. Saudi Arabia’s East-West pipeline has been affected by attacks, while threats to shipping around the Strait of Hormuz and Bab el-Mandeb are adding further uncertainty around the movement of crude out of the Gulf.
Higher oil matters well beyond the energy market. It feeds directly into inflation expectations and makes life harder for central banks that had hoped the worst of the price pressure was behind them.
A sustained energy shock could keep inflation elevated for longer and increase the chances that policymakers are forced back into tightening mode.
Fed hike now heavily priced
That possibility is already showing up in US rates.
Markets are pricing roughly an 86–87% probability of a 25 basis point Federal Reserve rate rise this week, after stronger-than-expected US inflation data pushed expectations sharply higher. Goldman Sachs and JPMorgan have both moved to expect a September hike.
The US 10-year Treasury yield was hovering close to 5% this morning, putting further pressure on equity valuations and particularly on longer-duration growth stocks.
If the Fed does raise rates on Wednesday, the decision itself may prove less important than what comes next. Investors will be watching the updated projections and Chair Kevin Warsh’s guidance for any indication that this is a one-off response to inflation – or the beginning of another tightening cycle.
Sterling slips ahead of the Bank of England
The dollar was slightly firmer overnight, while sterling and the euro both weakened.
Sterling was trading around $1.35, with the Bank of England also due to meet later this week. Markets currently expect the Bank to leave rates unchanged, although the renewed rise in energy prices gives policymakers another inflation problem to consider.
The Bank of Japan is meanwhile expected to tighten policy on Friday, adding another potential source of volatility for global bond and currency markets.
It makes for an unusually concentrated week. By Friday, investors should have a much clearer idea of how seriously the world’s major central banks are taking the latest resurgence in inflation pressure.
What to watch today
Monday itself is relatively light on major UK and US economic data, which means markets may spend much of the session trading the oil move and positioning ahead of the heavier calendar later in the week.
The main scheduled release is Canadian inflation at 1:30pm UK time. August CPI is expected to show headline inflation broadly unchanged at around 3.0% year-on-year, while several of the Bank of Canada’s preferred underlying inflation measures are also due. Statistics Canada releases the figures at 8:30am Eastern time.
Canadian manufacturing sales for July are released at the same time, while China may also publish August money-supply and new-loan figures during the session, although their release timing is tentative.
The bigger data starts arriving tomorrow.
UK labour-market figures are due on Tuesday, followed by UK inflation, US retail sales and the Federal Reserve decision on Wednesday. The Bank of England meets on Thursday, before the Bank of Japan decision on Friday.
