US-Iran Escalation Boosts Oil Prices, Raises Rate Hike Odds
Global stock markets were cautious on Monday due to escalating tensions between the US and Iran. The conflict drove up oil prices, causing concerns about inflation and potential interest rate hikes from major central banks.
The Brent oil futures price rose to over $90 a barrel after the US struck two Iranian launchers on Larak Island. Iran responded with attacks on US forces in Jordan and claimed it had hit a tanker in the Strait of Hormuz.
President Donald Trump tweeted that Kharg Island, Iran's main oil export terminal, was being 'blown to smithereens', although there was no military confirmation. The markets reacted by increasing the likelihood of a September Fed rate hike to 57%, causing short-term Treasury yields to rise sharply and flattening the yield curve.
Michael Feroli, chief US economist at JPMorgan, said that while he still expects a hike won't come until December, 'we continue to expect that a hike won’t come until December, though agree that the September meeting is live'. Barclays now predicts two 25-basis-point hikes in September and December.
The European STOXX 600 index edged lower at the open, while US stock futures were flat to slightly weaker. Japan's Nikkei slipped 0.1%, but Chinese blue chips recovered from early losses.