European stocks slip as Middle East escalation lifts crude and hawkish bets

European equities fell on Monday, with the pan-European STOXX 600 easing 0.1% as a sharp military escalation in the Middle East pushed crude prices above $90 a barrel and as aggressive repricing of U.S. interest-rate hike expectations set the stage for a major week of macroeconomic data.

The moves highlighted how quickly cross-asset sentiment can shift when geopolitics and monetary policy turn more restrictive at the same time. Gains in energy majors were not enough to offset broader selling across continental bourses, where trading desks were dealing with rising geopolitical risk premiums and elevated interest-rate expectations on both sides of the Atlantic.

The risk-off tone followed direct U.S.-Iranian military exchanges over the weekend, along with a hawkish turn in global bond markets after Federal Reserve Chair Kevin Warsh said at Jackson Hole that policymakers still have work to do to tame inflation.

Middle East strikes push oil above $90

Crude oil futures jumped nearly 3% to trade near $90.60 a barrel after U.S. forces carried out air strikes targeting two Iranian rocket launchers on Larak Island in the Strait of Hormuz. In response, Iranian forces retaliated by targeting U.S. military positions stationed in Jordan.

The military clash ended a brief lull in hostilities and weakened hopes of an immediate diplomatic solution to secure commercial shipping through the strategic waterway. The rise in crude reignited cost-push inflation concerns for European industrial sectors, even as it gave temporary support to integrated energy heavyweights.

Fed hike odds surge to 60% ahead of a heavy U.S. data week

Beyond energy-market pressure, equity valuations came under additional strain as money markets recalibrated central bank rate paths. Fed funds futures now price in a 60% probability of a 25-basis-point interest-rate hike at the Fed’s Sept. 16 meeting, up sharply from the 35% odds implied before Warsh’s speech.

Trading desks expect pricing to remain elevated ahead of the mid-September FOMC meeting, with this week’s series of U.S. labor-market and ISM survey data keeping a September rate hike firmly in play before the decisive August CPI report on Sept. 11. The sequence matters for European markets as well, because U.S. yields and dollar positioning often feed back into regional equity sentiment and financing conditions.

The July JOLTS report on Tuesday is expected to reinforce a low-hire, low-fire backdrop, followed by August ADP private payrolls on Wednesday and the closely watched nonfarm payrolls report on Friday, which is expected to show a recovery in hiring.

Speeches by Fed Governors Michael Barr on Tuesday and Christopher Waller on Thursday will be closely parsed to determine whether Warsh’s hawkish stance has broader support among voting members.

Looming ECB decision

Across the Atlantic, European debt and equity desks are also bracing for Eurozone inflation data due later this week.

The regional CPI release is expected to confirm persistent underlying price pressures and reinforce market pricing for another 25-basis-point rate hike from the European Central Bank when its Governing Council meets next week on Sept. 10.

That combination of firmer energy prices, sticky inflation data and central-bank uncertainty leaves investors focused on whether recent sector moves can be sustained. On regional bourses, Germany’s DAX fell 0.5% while France’s CAC 40 added 0.1%. London markets were closed for a holiday.

Among individual stocks, Bakkafrost shares fell 6% after missing estimates for Q2 results.

Source: Investing.com