Markets Breathe a Sigh of Relief as Oil Prices Plummet

Financial markets showed signs of relief on Monday as the US paused its strikes against Iran for a second consecutive night.

This led to a sharp decline in energy prices, with Brent oil dropping below $90 per barrel. The lower oil prices contributed to reduced inflation expectations, and euro area 1Y inflation swaps fell by around 0.2 percentage points to 2.4%.

Sovereign yields also decreased across the board, particularly in the euro area. However, interest rate expectations remained elevated as markets continued to price two additional ECB hikes, with at least one more hike being called for despite Middle East developments.

The Fed's rate expectations were little changed, with a nearly 40% probability of a hike tomorrow still priced in. Equities advanced in Europe following positive sessions in Asia, while US indices were mixed, with the S&P 500 remaining flat and the Nasdaq posting modest losses as investors rotated from semiconductors and AI-related stocks into cyclical sectors.