Middle East Escalation Sparks Oil Price Surge, Hawkish Bets

European stocks fell on Monday, August 31, as rising tensions in the Middle East drove up oil prices and increased hawkish bets by central banks. The pan-European STOXX 600 Index dropped 0.2% on the day, led by a nearly 1% decline in Germany's DAX and a 0.1% decrease in France's CAC 40.

The surge in crude oil prices to near $90.60 a barrel followed US air strikes targeting Iranian rocket launchers in the Strait of Hormuz, which sparked a military response from Iran. The sudden jump in energy costs reignited concerns about inflation across European industrial and transport sectors.

Additionally, investors adjusted their expectations for central bank rate hikes following Federal Reserve Chair Kevin Warsh's hawkish address at the Jackson Hole symposium on Friday. Fed funds futures now price in a nearly 60% probability of a 25-basis-point interest rate hike at the Fed's September 16 meeting.