The renewed conflict between the US and Iran, which saw a fresh round of strikes by both nations, has significantly impacted global financial markets. Oil prices have surged, with Brent crude futures climbing to $94.52 a barrel and US WTI futures reaching levels not seen since July. This military escalation, following a month-long lull in hostilities, has caused widespread concern about supply disruptions, particularly in the Strait of Hormuz, a crucial transit point for 20% of the world's liquefied natural gas.
Wall Street has reacted negatively to the developments, experiencing a third consecutive session of losses. The S&P 500 index declined by 0.71%, and the Nasdaq Composite fell more than 1%. The surge in oil prices has intensified jitters about interest rate hikes, erasing market gains from what had been a five-month winning streak. This has led to a sell-off in bonds globally, pushing yields higher. The US 10-year Treasury yield rose to 4.80%, hitting its highest levels since January 2025, while the short-term 2-year yield increased to 4.40%, as markets began to price in potential rate increases by the Federal Reserve.
Central bank officials have signaled a hawkish stance. Federal Reserve Governor Michael Barr stated he would support a rate hike if inflation does not sufficiently moderate, echoing comments from Fed Chair Kevin Warsh. Markets are now leaning towards a quarter-point hike this month, with the benchmark rate already at 3.50%-3.75%. In Europe, consumer prices rose to 3.3% in August, exceeding expectations. The UK 10-year gilt yield reached 5.29%, its highest since August 2007, and Germany's benchmark yield climbed to 3.39%, a 2011 high. These rising yields are spooking investors, who anticipate central banks will raise interest rates to combat inflation, potentially at the expense of economic growth.
