Higher oil weighs on appetite

(MENAFN- MENAFNEditorial) Markets remain on the defensive as the latest escalation in the Middle East pushes brent to the brink of $100 a barrel. US forces have struck Iranian oil tankers following attempted attacks on US naval vessels, while Iran retaliated against a US-used base in Jordan and says it targeted vessels attempting to cross the Strait of Hormuz. Houthi attacks on Saudi energy facilities have widened the threat further, raising concerns that disruption could spread beyond Iranian supply to the infrastructure and alternative routes that have helped keep Gulf crude flowing.

That has brought the inflationary consequences of the conflict firmly back into focus. Wall Street fell on Tuesday as higher crude revived concerns that the energy shock could stall disinflation and force central banks to remain restrictive. US rate expectations have shifted accordingly, while upcoming inflation data will be particularly important in determining whether $100 oil is beginning to feed more materially into the Fed outlook.

Europe faces an even more immediate policy test with the ECB meeting on Thursday. Markets are widely positioned for a 25bp hike, after the ECB explicitly warned in July that the full inflationary impact of the energy shock had yet to emerge. The latest surge in oil, and European gas prices, makes that concern harder to dismiss. Focus will be on Christine Lagarde's guidance on whether this is sufficient insurance against the energy shock or whether further tightening remains likely.

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