Further central bank tightening expected

(MENAFN- MENAFNEditorial) Markets are starting the week on a defensive footing, with the combination of another escalation in the Middle East and increasingly hawkish central-bank expectations weighing on risk appetite. Asian equities have fallen, followed by Europe, and US futures are pointing lower. The backdrop has become increasingly uncomfortable for equities with oil surging again, bond yields remaining elevated and markets anticipating potential rate hikes from both the Fed and Bank of Japan this week. Oil is once again the biggest geopolitical story. Brent has jumped more than 3% towards $106, having already gained almost 9% last week, after fresh attacks on shipping in the Strait of Hormuz and a drone strike prompted Saudi Arabia to temporarily shut its East-West pipeline. The Houthi advance in Yemen is adding another layer of concern around Bab el-Mandeb and Saudi infrastructure. Importantly, today's planned meeting in Oman between Iran and Gulf states over reopening Hormuz has reportedly been postponed, removing one of the few potential near-term de-escalation catalysts.

The oil shock is feeding directly into the rates story. Friday's hotter US CPI report pushed markets to price roughly an 88% probability of a 25bp Fed hike on Wednesday, with another hike increasingly expected before year-end. Core CPI rose 0.3% month-on-month versus 0.2% expected, reinforcing Kevin Warsh's argument that inflation remains too persistent for the Fed to remain complacent. This makes for an unusually important global central-bank week. The ECB has already restarted tightening, the Fed could deliver its first hike since 2023 on Wednesday, the BoE is expected to hold on Thursday, and markets assign roughly a 77% probability of a BoJ hike to 1.25% on Friday. The yen remains near seven-month highs around 154 as investors anticipate further Japanese tightening and the US-Japan rate differential narrows.

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