Deadlocked Middle East Peace Talks Fuel Oil Gains and Inflation Concerns
Market Reactions and Economic Implications
A look at the day ahead in European and global markets from Ankur Banerjee
Stalled Peace Talks and Oil Price Surge
Markets are stuck in a loop of hope and despair as talks to end the war in the Middle East remain deadlocked, with the latest setback sending oil prices higher, fanning inflation worries and underpinning the dollar.
U.S. President Donald Trump said a ceasefire with Iran was "on life support" after Tehran rejected a U.S. proposal to end the conflict. That led to a slight risk-off mood with investors wagering both sides would be reluctant to escalate attacks.
Impact on Investor Sentiment
While a ceasefire in place since April 7 has helped lift investor sentiment, the lack of progress in negotiations between Washington and Tehran is beginning to weigh on certain corners of the market.
Bond Yields and Central Bank Responses
Bond yields have been steadily rising across the globe as investors brace for interest rates to stay higher for longer to tackle inflationary pressure because of elevated energy prices.
In Europe, markets fully price two 25-basis point hikes across the ECB's three meetings to September and see around a 75% chance of a third by year-end, while traders have fully priced out any rate cuts this year from the Federal Reserve.
Dollar Strength and Investor Hopes
That has left the U.S. dollar on the front foot on safe-haven demand, although the gains are constrained as investors still pin hopes on some sort of resolution in the coming days.
Upcoming Inflation Data
U.S. inflation data later in the day will take centre stage as investors parse the report to get a sense of the impact of the war on prices. The final inflation data for April in Germany is also due after an early report showed a rise in prices.
European Vulnerabilities
That data may sharpen focus on just how vulnerable energy-dependent Europe remains, especially with the pivotal Strait of Hormuz effectively shut down 10 weeks into the conflict.
Market Outlook and Key Developments
Futures point to a lower open as the dour mood moves to Europe, with the pan-European STOXX 600 still trading about 4% below pre-war levels and lagging global peers that have rebounded on artificial intelligence-driven optimism.
Events to Watch
Germany: April inflation report, May ZEW sentiment survey
U.S.: Inflation report
(By Ankur Banerjee in Singapore; Editing by Sonali Paul)