Stocks Fall on Inflation Fears Amid Rising Oil and Geopolitical Uncertainty
Market Reactions to Global Economic and Political Events
By Amanda Cooper
Oil Prices Surge on Middle East Tensions
LONDON, Sept 7 (Reuters) - Rising oil prices, conflict in the Middle East and political uncertainty in Europe kept investors on edge on Monday, leaving stocks to drift lower ahead of critical U.S. inflation data later this week.
Tehran said it would announce a restricted zone outside the Strait of Hormuz in coming days, after U.S. forces hit three Iranian tankers and Iran's Islamic Revolutionary Guard Corps launched ballistic missiles at two U.S. Navy ships.
Impact on Energy Markets
As a result, Brent crude futures rose 1.3% to $97.5 a barrel, the most in seven weeks. The oil price surged almost 8% last week and is now 35% above where it was in late February, before the war started.
Prices for diesel, which powers transport, shipping, farming and manufacturing, hit record highs last week and are around 90% higher than they were prior to the war.
Central Banks Respond to Inflation
With food and fuel prices rising everywhere, central banks are more likely than not to raise interest rates, making this week's reading of U.S. consumer prices a key focus for investors.
Interest Rate Hikes in Focus
The European Central Bank is expected to lift rates to 2.5% on Thursday. Futures imply traders also expect another hike to 2.75% by December.
Likewise, markets are pricing in a 75% chance the Bank of Japan will raise rates a quarter point at its meeting on September 18, with a 60% probability of another move by December.
Expert Commentary
"Central bank patience through the energy shock has been supportive of asset prices and the credit cycle," said Bruce Kasman, global head of economics at JPMorgan. "However, central banks are now on the move."
Rate Hikes?
For the Federal Reserve, last week's payrolls report, which blew past expectations with a rise of 162,000 in August, has left markets pricing a 58% chance of a hike when it meets on September 16, and 70% for a move in October.
Currency Market Movements
With an ECB hike all but in the bag, the euro rose 0.14% to $1.1629. It has drifted lower since hitting three-month highs in August and, with political friction mounting on multiple fronts, may struggle to get much upward momentum, analysts said.
European Political Uncertainty
In Germany, the Alternative for Germany (AfD) surged into first place in state elections in Saxony-Anhalt on Sunday, putting a far-right party within reach of power at state level for the first time since World War Two. While short of a majority and a long way from gaining national power, the AfD has said one of its policies would be to ditch the euro.
"This development is dangerous for the longer-term stability of the single currency," XTB research director Kathleen Brooks said.
In France, recent polls show far-right leader Marine Le Pen, who in the past has favoured abandoning the euro, would likely win the first round of next year's presidential elections.
"The next few years could see waves of political change in Europe and a shift to the right in the two largest economies. This may not be a problem for FX traders today, but it is a problem for tomorrow, and it could explain why the euro is one of the weakest currencies compared to its peers so far in 2026," Brooks said.
Comparative Performance of Major Currencies
The euro has fallen 1.1% this year, making it the weakest performing major currency against the dollar, compared with a modest 0.7% gain in the Japanese yen, which has been partly boosted by official intervention, and a 0.4% rise in the pound.
The dollar retreated against the yen, falling 1.2% to 154.32, as a burst of buying propelled the Japanese currency to a seven-month high. The Japanese currency posted its strongest weekly performance in a month last week, as mounting expectations for the BOJ to hike rates, along with the ongoing threat of more official buying, triggered a short squeeze.
Stock Market Performance
Meanwhile, European stocks struggled into positive territory, while on Wall Street, a U.S. holiday kept turnover light with S&P 500 futures down 0.2% and Nasdaq futures up 0.2%.
(Additional reporting by Wayne Cole; Editing by Stephen Coates, Andrew Cawthorne and Alex Richardson)
