Global markets are bracing for increased volatility as rising oil prices, geopolitical tensions in the Middle East, and political uncertainty in Europe put pressure on central banks to raise interest rates. Brent crude futures have climbed to over $97 a barrel, marking a seven-week high and a 35% increase since late February, before the war began. Diesel prices have also hit record highs, now approximately 90% higher than pre-war levels, contributing to widespread inflation fears.
Central banks are increasingly signaling tighter monetary policies. The European Central Bank is expected to raise rates to 2.5% on Thursday, with futures indicating a 75% chance of another hike to 3.0% by December. Similarly, markets are pricing in a 75% chance that the Bank of Japan will increase rates by a quarter point on September 18, with a 60% probability of another move by year-end. The US Federal Reserve also faces pressure, with a stronger-than-expected August jobs report showing 162,000 new payrolls, leading to a 58% chance of a rate hike on September 16 and 70% for an October move.
Bond markets are reflecting these concerns, with yields climbing globally. French, Italian, and UK longer-term borrowing costs have seen the steepest rises among G7 nations over the past month, reaching multi-year highs. Even Germany, traditionally a safe haven, is seeing investors demand the highest compensation since 2011 for its 30-year debt. Despite the global bond selloff, some investors are still embracing risk assets, although the S&P 500 closed lower following the US jobs report. The yen has strengthened against the dollar, rising 1% to 154.76 per dollar, reaching its highest level since February due to rate hike expectations and intervention threats, while the euro remained largely unchanged at $1.1623.
JPMorgan strategists, including Bruce Kasman, note that central banks, which had previously shown patience during the energy shock, are now actively tightening. While some, like JPMorgan Chase & Co. strategists led by Mislav Matejka, suggest buying dips in equities given a robust earnings outlook, others, like Geoff Yu of BNY, warn that markets will be adjusting positioning ahead of the Fed’s blackout period, with the risk of a hawkish Fed stance impacting equities. Investors are keenly awaiting the upcoming US inflation data later this week, which will be crucial in determining the Fed's next steps.
