A spike in oil prices drove Europe’s government borrowing costs to long-term highs on Thursday as reignited inflation worries left traders bracing for a hawkish meeting at the European Central Bank later in the day.
Share markets were also on the back foot early on, as disappointing earnings from heavyweight chipmaker sent its shares tumbling 15% and Google-parent Alphabet’s plan to ramp up its AI spending by another $15 billion this year continued to sink in.
The main focus though remained on the renewed surge in oil prices – and global borrowing costs – following the re-escalation of the conflict in the Middle East between the United States and Iran.
The Iran-aligned Houthis said on Thursday they had struck two Saudi oil tankers as part of a naval blockade on Saudi Arabia, threatening to create a second chokepoint on global oil supplies alongside Iran’s near-closure of the Strait of Hormuz.
Meanwhile, the US military carried out a new round of strikes on Iran at President Donald Trump’s direction, marking a 12th successive night of American attacks and prompting further Iranian retaliation.
Brent jumped 4% to nearly $98 a barrel, putting the psychological $100 threshold well within reach and driving Germany’s 10-year bund yield — the benchmark for euro zone borrowing costs — above 3.2% for the first time since the woes of the bloc’s debt crisis in 2011.
It also sharpened focus on the day’s ECB meeting. Markets see just a one-in-five chance of another interest rate hike at this meeting. They do, however, see a four-in-five chance of a hike in September.
“One could argue for a front-loaded hike today, but over previous years the ECB has always fully telegraphed any policy moves in advance,” said Michiel Tukker, senior rates strategist at ING.
