Energy markets whipsawed Tuesday after US military strikes against Iran triggered a spike in oil and gas prices, driving expectations for interest rate hikes across the Atlantic. But relief came just as quickly when Donald Trump abandoned a controversial plan to impose a 20% tariff on shipping through the Strait of Hormuz.
Brent crude, the global oil benchmark, climbed as high as 4.6% to $87.08 a barrel, marking its strongest level in more than a month. The initial surge reflected concern that escalating US-Iran tensions could disrupt one of the world's most critical energy chokepoints. However, the gains proved short-lived, with crude settling at roughly 1% higher by day's end.
The volatility mirrored Trump's shifting rhetoric. He first stated the strait would remain open "with or without Iran," but insisted the US would charge transiting vessels 20% of "any and all costs necessary" for security and safety operations. That threat sent natural gas prices climbing sharply before Trump reversed course and scrapped the fee entirely.
European gas markets felt the pressure acutely. The Dutch natural gas contract for August delivery, which serves as the continent's pricing benchmark, jumped nearly 3% to €52.8 per megawatt hour, its highest point since early April. The UK natural gas contract for the same delivery month rose 3.3% to 129.4 pence per therm, the strongest level in more than three months.
Higher energy prices stirred inflation concerns that rippled through rate expectations. Financial markets began pricing in a quarter-point rate increase from the Bank of England by September for the first time in a month, with forecasts for another hike by year's end. The European Central Bank faced similar projections, with traders betting on rate rises in both September and December.
The shift was striking given the earlier landscape. At the start of the month, when a fragile US-Iran ceasefire held, swaps markets priced in less than a quarter-point rise for both the Bank of England and ECB. UK government bond yields spiked as inflation worries took hold, with the 10-year gilt briefly climbing above 5% before settling at 4.97%, its highest level since May.
European equity markets absorbed the shocks with modest losses. The Stoxx Europe 600, tracking the continent's largest companies, dipped 0.5% before recovering to close slightly higher. London's FTSE 100 slipped 0.4% in early trading but stabilized after Trump dropped the Hormuz tariff plan. Oil stocks drove gains where they appeared: BP climbed 2.4% and Shell rose 1.7%, both benefiting from the energy price surge.
Asian markets proved more resilient, buoyed by a rebound in technology shares. South Korea's Kospi and Japan's Nikkei 225 both gained 0.7%, while China's Shanghai Composite jumped 1.4%.
Author James Rodriguez: "Markets got a glimpse of how quickly geopolitical chaos can force central banks' hands on rates, but Trump's quick retreat on the tariff showed investors that even escalating tensions can find release valves if leadership backs down."
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