Markets in a Minute

ESCALATION

Last week was negative for Global equity and Bond markets as conflict in the Middle East escalated, pushing energy prices higher. Equity markets suffered as investors assessed implications for growth while bond markets drew down on fears that an inflation spike could force interest rates into a higher-for-longer scenario. A weak US payrolls report added to concerns.

This week, developments in the Middle East will dominate. Overnight, oil prices rose by 29% to $119 per barrel at one stage before dropping back below $110 on news that the G7 group of countries will meet to discuss a coordinated release of national strategic reserves. Asian and European equity and bond markets opened lower on Monday.

Investors will also be watching key US data relating to jobs and inflation ahead of next week's Federal Reserve rate committee meeting.

Oil prices closed in on $120 per barrel overnight following Iran's announcement that Ali Khamenei's son, Mojtaba has been appointed as their new Supreme Leader. This move is seen as a sign that the conflict will not see a short-term resolution. Liquified Natural Gas (LNG) prices rose by up to 50% on news that Qatar was shutting down the Ras Laffan plant. Despite the US offering naval assistance to shipping companies, rising energy costs drove equity market performance with those economies most dependent on energy imports (Asia & Europe) faring out worse than the US who remain a net energy exporter. Inflation in the Eurozone ticked up to 1.9% while data in the US Manufacturing and Services PMI's also showed upward inflation pressures. Bonds in both markets sold down as investors revisited interest rate expectations. Friday's non-farm payroll report showed that the US shed 92,000 jobs last month while unemployment rose to 4.4%. The dual threats on inflation and a softening jobs market presents a challenging backdrop to the Federal Reserve's March rate meeting next week.

The S&P 500 finished the week down -2.02% whilst the STOXX 600 in Europe dropped -5.55% in the week as a sharp increase in LNG prices raised concern amongst investors. Asian markets were also impacted given their reliance on Gulf energy.

Bond yields rose last week, (bond yields rise as bond prices fall) on both sides of the Atlantic. The 10-year US Treasury yield rose by ~18bps to 4.14% as inflationary fears forced markets to recalculate their interest rate expectations. The German bund equivalent increased by 21bps to 2.86% as inflation rose to 1.9%. Market expectations for an ECB rate increase now stand at just over 50%.

• Wed 11th US - CPI and Core Inflation data
• Thur 12th US - Unemployment Survey data
• Fri 13th US - Job Openings & Labour Turnover Survey (JOLTS), Consumer Sentiment