Middle East Conflict Drives Oil Prices and Bond Yields Higher

The escalating conflict in the Middle East has driven oil prices above $95 per barrel and pushed European natural gas prices to their highest level since January 2023. The surge in energy costs has raised concerns that supply-chain inflationary pressures will worsen further.

Global bond yields have also climbed to near two-decade highs, with the 10-year UK gilt yield jumping 16 basis points in a single day on Tuesday and the German 10-year bund yield touching its highest level since April 2011. The Reserve Bank of New Zealand raised rates for a second consecutive meeting, further reinforcing expectations that the global tightening cycle is not yet over.

The European Central Bank (ECB) is expected to raise interest rates by a quarter point at next week's policy meeting, with traders nearly certain of this outcome. Eurozone inflation rose to 3.3% in August, driven primarily by rising energy costs.