Weekly market commentary

A volatile week for markets began with investors disappointed by the lack of negotiations between the US and Iran to resolve the conflict in the Middle East and officially re-open the Strait of Hormuz. Brent Crude Oil prices have fluctuated between $99 and $108 per barrel as mixed news around energy availability hit the headlines. It is estimated that Middle East exports are now just 11% below their pre-war levels, with oil flows topping 13.5m barrels per day, while Saudia Arabia has begun restoring flows of oil through their East-West pipeline. Simultaneously, the US have threatened to stop exports of diesel to Europe and the UK to lower pump prices at home – pushing Europe to release its own reserves.

Persistently higher energy prices have strengthened global inflationary impulses and put pressure on global bond yields, which has been exhibited in Europe especially. Germany, France and Italy all saw higher than expected inflation prints this week, contributing to Eurozone CPI as a whole rising to 3.8% YoY. Bond traders have been particularly punishing of French debt; the yield on 10yr French Government bonds rising by more than a percentage point since June, with the spread over German debt widening considerably over the last week. The focus on France stems from nervousness around missed fiscal deficit targets, the inability to pass policy and the increasing popularity of more polarising politicians just a year from presidential elections.

Equity markets were again impacted by bond volatility, yet proved somewhat resilient to more extreme yield moves. US data painted a mixed picture of the economy, with lower than expected Core PCE (the Federal Reserve’s preferred inflation measure) and stable jobs reports offset by a dip in PMI’s, which give an indication of economic growth through business surveys. Those same surveys also showed an increase in prices paid; conflicting the hard data inflation figures. Comments from a couple of Fed speakers appeared relatively dovish, with New York Fed President Williams noting that “there is no need for urgency” in relation to hiking interest rates. Markets cut the pricing of an October hike from 70% to 47% in response.