Oil prices head north
Iran’s attack on vessels transiting the Strait of Hormuz prompted a rise in oil prices, higher bond yields, lower stocks, and some firming of the dollar. The US last night announced that it had carried out strikes on targets in Iran in response (as well as revoking a temporary waiver allowing the sale of Iranian oil), while Iran said it had conducted strikes on US military sites in the Middle East, all of which of course raises concerns about the ongoing “peace talks” between the two sides. The fall-out in FX has been limited enough though. The euro and sterling have both lost some ground to the dollar to trade at around $1.1425 and $1.3365 respectively this morning, albeit off overnight lows of about $1.14 and $1.3340. EURGBP is little changed through all this, hovering just below the £0.8550 level.
Government bond yields spiked higher on the back of rising oil prices – Brent crude is up at a circa 2-week high of over $76.5 a barrel – with US 10-year yields climbing by around 8bps (to 4.55%, a 1-month high) and equivalent German and UK yields increasing by around 5-6bps (both are continuing to edge higher at the start of play this morning). Equity markets were under pressure over the course of the day with the Stoxx Europe 600 and the S&P 500 both shedding just over half a percent.
The Bank of England notes in its latest Financial Stability Report that “AI has the potential to raise productivity across a range of sectors and, in turn, support long-term economic growth,” while also highlighting that there is “uncertainty over the scale and timing of future productivity gains and the ability of companies to monetise these”. It also notes that “while AI-related equity valuations are underpinned by forecasts of strong long-term earnings growth, those forecasts are highly uncertain and depend on the successful buildout of infrastructure, continued access to financing, and the pace at which AI is adopted.”
Looking to the day ahead, the Fed publishes the minutes of its June monetary policy meeting, which was the first under new chair Kevin Warsh. During his post-meeting press conference, Warsh said on a number of occasions that Fed members “are unanimously and unambiguously committed” to returning inflation to its 2% target, so the minutes will be scrutinised for any indications about what that might mean for interest rates in the near-term. The IMF publishes a World Economic Outlook update, which will take into account the fall in oil prices over the past month or so, while there are a few ECB members due to speak over the course of the day.