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Investors watch MidEast developments before Fed meeting as Brent falls over 4%.
Brent crude fell on Friday as it retreated from above $100 per barrel. Meanwhile, investors analyzed the Middle East conflict to determine its implications for inflation in advance of next week's U.S. rate decision. By 11:50 am EDT (1550 GMT), spot gold had risen 0.6% to $4,073.23 an ounce after falling 2% the previous session. Prices are up 1.4% so far this week, thanks to dip-buying early in the week. U.S. Gold Futures for August Delivery gained 0.6% to $4,075.90. "Gold and Silver are carving out bases around $3,950 each and $55 respectively, despite the relentlessly rising yields. Gold feels ready to move higher. While a stop-loss below $3,950 can't be excluded, a sharp war escalated, a?Fed on hold next weekend would help, said Tai Wong. Brent crude oil fell by?over 4 percent after it rose over 7 percent to reach $100 for the first session since May. This was after Iran-aligned Houthis claimed they had hit two Saudi oil tanks in the Red Sea. Bullion is down about 23% in the last few months since the U.S. war against Iran began late February. This has been a result of expectations that inflation due to war could keep interest rates high for longer. Gold is often seen as an inflation hedge, but higher interest rates can be detrimental to the metal. Investors are now awaiting the U.S. Federal Reserve policy meeting result next week. It is?largely anticipated that it will?keep rates unchanged. According to the CME FedWatch Tool, traders are pricing in an 80% probability of a U.S. interest rate hike in September. Recent strength in bullion seems to be driven by dip-buying and short covering. The sharp decline from the record highs of earlier this year has been followed by a recovery. Silver spot rose by 1.9%, to 58.77 dollars per ounce. Platinum fell by 0.5%, to 1,592.89 dollars, while palladium gained 0.2%, to $1259.42.
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European stocks gain as SAP boosts tech stocks, Middle East on the watch
Investors took comfort in some corporate earnings and weighed the potential impact of higher oil prices on monetary policy. The STOXX 600 index, which measures the performance of all European markets, rose 0.6% to 644.67 for a second consecutive week. SAP, the software giant, gained 10% on Germany's DAX after it reported that second-quarter cloud backlog growth was ahead of analyst expectations. The technology index gained 1.7% after STMicroelectronics' and BE Semiconductor's quarterly reports failed to impress investors on Thursday. Investors are trying to balance AI growth with stretched valuations and returns on large investments in technology. This has led to recent swings in share prices. The two biggest problems for big tech companies is that capex can no longer be financed by free cash flow and that open-source AI, which is cheaper, is seriously threatening their business models," said analysts at Deutsche Bank led by Jim Reid. STOXX 600 technology stocks are up about 17% this year. This is just behind the energy stocks, which have risen by 32%. Oil and gas stocks did not 'capitalise' on Brent crude prices which remained above $100 per barrel on Friday. A 6.4% fall in Neste, the Finnish biofuel manufacturer and oil refiner, was a factor. "We have moved from pricing during a period with weak growth and high inflation to possibly even a recession." Chris Beauchamp is the chief market analyst for IG. "We're not there yet...but we could reach that point very soon," he said. Three policymakers on Friday said that the European Central Bank may have to increase interest rates once again due to the high inflation risk. The bank had left rates unchanged on Thursday, but still kept the September rate hike on the table. According to LSEG data, markets are still pricing in a 25% increase. There is also a 70% probability of another similar 'hike' by the end of 2026. The U.S. government imposed new tariffs on 60 trading partners of 10% and 12.5% over accusations of lax enforcement regarding?forced labor bans. This was just before a temporary global tariff of 10% expired. Volkswagen, among other stocks fell about 1% after the automaker lowered its previous revenue forecast due to a 9.5% drop in second-quarter profits. Valmet, a pulp, paper and energy technology company that announced second-quarter results above expectations -and announced the possibility of separating its business - soared by 22%. Securitas, a security services provider in Sweden, fell 11% on its first day since August 2006. The company reported a lower than expected second-quarter core income. (Reporting from Tharuniyaa and Purvi in Bengaluru; additional reporting by Medha, and editing by Sonia Cheema and Maju Samuel)
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Sources say Pakistan and Iran are exploring a path to new talks with the US, in response to a China-initiated effort.
Three Pakistani sources have confirmed that Pakistan is looking at a way to resume the stalled U.S.-Iran war talks, which were halted after a Chinese push. Sources said that exploratory?discussions?took place this week during the visit of Iran's interior minister Eskandar Momeni to Islamabad, his second in the past 10 days. According to Pakistani government officials, Momeni met this week with Asim Munir, the army chief of Pakistan, and other government leaders in Pakistan. Three sources warned that obstacles to talks with the U.S. remained high. STRAIT OF HORMUD CLOSURE HITTING CHINA Pakistan is in a difficult position as a possible future mediator. Yemen's Iran backed Houthi Movement declared a Naval Blockade this week against Saudi Arabia. Saudi Arabia is a close ally to Islamabad and signed a Mutual Defence Treaty with Pakistan in last year. Pakistan depends on Saudi Arabia for financial support. Islamabad also has condemned the recent Houthi attacks against Saudi Arabia. Riyadh could be frustrated if it is perceived as being too receptive towards Iranian arguments. Beijing is also a major financial supporter of Islamabad and has an economic interest in finding a diplomatic resolution to reopening important Middle Eastern trade routes. All three sources in Pakistan said that Ishaq dar, Pakistan's foreign minister, had also discussed the new Middle East efforts with Chinese officials during his visit to China last week. All three sources said that they spoke under the condition of anonymity because they weren't authorized to speak publicly about the issue. A Pakistani official stated that "the Chinese are upset because Iran's attack on other Gulf States and the closing of the Strait of Hormuz is hitting their interests." Beijing would be affected by disruptions in the Red Sea, another important trade route. Dar and Pakistan's military public relations arm did not respond when asked for comments. China's Foreign Ministry said in a press release that "China supports mediation efforts by Pakistan and other Parties." China added that it will "continue to play an active role in restoring the peace and tranquility in Middle East Gulf Region as soon as possible." OFFICIAL: HALT IN ATTACKS REQUIRED Beijing, despite the international sanctions against Tehran, is Iran's biggest trading partner and its primary buyer of crude oil exported by Tehran. It benefits from a steep discount. China has increased its support for Iran's security by providing dual-use components and chip equipment, as well as satellite navigation systems. Beijing has consistently backed Pakistan’s mediation efforts, and in March it sent its special envoy on a Middle East shuttle diplomacy trip. In June, the U.S. signed a Memorandum of Understanding with Iran to end the war through mediation by Pakistan and Qatar. The 60-day period was meant to allow for negotiations towards a permanent agreement. However, indirect negotiations did not yield any progress. The conflict continued as both sides blamed one another for the violations. The Houthis announced on Thursday that two Saudi oil tanks were destroyed as part of their "naval blockade", threatening to close the Strait of Hormuz and create a second choke point for global oil supplies. The latest diplomatic efforts of Pakistan have been hampered by the escalation. Pakistani official said that a halt to attacks against Saudi Arabia and the other Gulf nations was now a "prerequisite" for any future talks. The official said that Pakistan had sent a message to Iran. Reporting by Asif Bukhari, Mubasher in Lahore, and Liz Lee from Beijing. Editing by Rick Noack & Andrew Heavens.
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JPMorgan warns that a'super El Nino' and oil shock may cause global inflation to rise
JPMorgan economists in a Friday report said that a rapidly intensifying El Nino climate pattern, combined with higher energy prices, could add 0.3 percentage point to global inflation. This would hit emerging markets especially hard. Forecasts indicate that there is an 81% chance that this El Nino episode will develop into a "very powerful" or "super El Nino at the end of this year, and that conditions are likely to persist next year. This event would be among the most severe in recent years - and raise the risks of disruptions to the global food supply chain. JPMorgan estimated a super El Nino would increase global food inflation at its height by 0.7 percentage points. The biggest impact is usually felt four to eight months after the weather shock. When combined with energy prices that have risen due to the Iran War, and which have increased the cost of fuel, fertilizer, and food packaging, global food inflation can double. Analysts at JPMorgan said that the resulting increase in food inflation would be a 5% annualised level in 1H27, adding 0.6 percentage point to global headline inflation. This would slow down next year's anticipated inflation decline by about 0.3 percentage points. Emerging Markets to?Bear the Brant The impact would be felt most in emerging markets in Asia and Latin America, where food is a bigger part of consumer baskets. Agriculture is also more weather sensitive. They identified India, Indonesia and Brazil as being particularly vulnerable, and added that Taiwan and South Korea were also vulnerable. In contrast, the direct impact of El Nino on food inflation in Europe and other developed economies is expected to be smaller. In these countries, it is likely that higher energy costs will be the primary driver of food price increases. The bank stated that the current situation is more favorable than previous El Nino episodes. Global grain stocks are adequate, rice supplies in Asia are relatively healthy, and food inflation is currently relatively low. Food inflation could become a major source of divergence among countries and regions if a powerful El Nino is combined with a period of sustained high energy prices. (Reporting and editing by Kirsten Doovan; Marc Jones)
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U.S. sanctions against the Iranian Zanjani network
The United States announced on Friday that they would be imposing additional sanctions against nine firms and four individuals who are associated with the Iranian financier, 'Babak Zanjani. The U.S. Treasury Department announced that the new designations targeted Zanjani’s Iran-based operations through his "Dot One", as well as several firms in Turkey and the United Arab Emirates who have supported his already designated digital assets exchanges. Treasury said Zanjani leveraged a diverse portfolio, including financial services, digital asset trading, gold and precious gemstone production, major infrastructure projects and other areas, to launder money and move funds for Iran. Treasury Secretary Scott Bessent stated in a press release that "the Iranian regime continues paying a steep economic price for their reckless behavior." The rial has plunged to yet another record low, and inflation is on the rise. Treasury will continue to cut off economic access for corrupt Iranian regime leaders, along with their financiers and facilitaters. Treasury's Office for Foreign Assets Control first designated Zanjani in January, along with his two largest digital asset projects Zedcex Exchange Limited and Zedxion Exchange Limited. Reporting by Andrea Shalal, editing by Michelle Nichols
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Polish President refers windfall tax decision to Constitutional Court
The Polish president has said that he will refer a bill which would impose a windfall tax?on the profits of oil and gas companies to the country's Constitutional Court, citing?concerns about its'retroactive' nature and 'potential impact' on consumers. The Polish Parliament has approved a bill that will tax windfall profits made by oil and gas firms who have enjoyed soaring margins in the face of supply shocks caused by the Middle East conflict. The bill assumes that in 2026, fuel sales exceeding the average of the previous year by 20% will be taxed 60%. This would generate 4 billion zlotys (about $1.05 billion) for the state budget. However, it still needs the final approval of President Karol Nwrocki. The President said that he had doubts regarding the bill because it would apply "retroactively" to revenues generated as far back as March. In a recorded message posted on X, he stated that "in a democracy governed by rule of law citizens and entrepreneurs need to know what regulations are in effect at the moment they make decisions." He said that he was also concerned about the tax being passed on to consumers as higher?prices. This would make life more difficult for those already struggling with'surging energy costs. "I can't accept a situation in which an attempt to patch up the state finances is presented to citizens as a way to protect their interests, when it will actually result in another wave of prices hikes," said he. For a bill to become law, it must be signed by the?Polish President. He can also veto or refer them to Constitutional Tribunal (the constitutional court).
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Investors focus on Middle East developments as Fed rate decision approaches
Gold held steady as Brent crude fell from above $100 per barrel on Friday, and investors assessed the Middle East conflict's implications for inflation in advance of next week's U.S. rate decision. The spot price of gold remained unchanged at $4 046.10 an ounce as of 09:17 am EDT (1317 GMT), despite a 2% drop in the previous session. The contract rose 0.7% for the week due to dip buying early in the week. U.S. Gold Futures for August Delivery?gained 0.3 percent to $4,063.60. "Gold and Silver are carving out bases around $3,950 and $55 respectively, despite the relentlessly higher yields. Gold feels ready to?back up... While a stop loss move below cannot be ruled out, a sharp war escalate can't. Brent crude oil prices dropped over 3% after a rise of over 7% in the previous session, when they settled above $100 for the first since May. This was after Iran-aligned Houthis claimed to have hit two Saudi oil tanks in the Red Sea. Bullion is down about 23% in the last few months since the U.S. war against Iran began late February. This has been a result of expectations that inflation due to war could cause interest rates to rise. Gold is often seen as an inflation hedge, but higher interest rates can have a negative impact on this non-yielding metal. Investors are now awaiting the U.S. Federal Reserve policy meeting next week. It is expected that rates will remain unchanged. According to the CME FedWatch Tool, traders are pricing in an 80% probability of a U.S. interest rate hike in September. The recent strength in bullion seems to be driven by dip-buying, and short-covering. The sharp decline from the record highs of earlier this year has been followed by a recovery. Silver spot rose by 0.4%, to $57.92 an ounce. Platinum fell 1.3%, to $1.582.40. Palladium dropped 1%, to $1.244.24.
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Quotes-Russians Nabiullina, Zabotkin and Zabotkin discuss the key rate, fuel shortage and sanctions against Russian banks
Elvira Nabiullina, the Russian Central Bank Governor and Alexei Zabotkin, her deputy, held a press conference Friday following the bank's decision to cut its key interest rate by 25 basis points. Nabiullina & Zabotkin both spoke Russian. The following quotes were translated by into English. NABIULLINA ON RATE DECISION "We considered two options carefully: keeping the rate at the same level or reducing it by 0.25 percent. Several isolated proposals were made to increase the rate. However, we focused on these two options. NABIULLINA ON FUEL ?SUPPLY CRUNCH We analysed the current fuel situation. This relates first and foremost to what is known as supply-shocks. Such shocks are only considered if they cause significant secondary effects and feed through to sustained inflation. They also depend on their duration. We can see the government taking steps to stabilize the situation on fuel markets. We have carefully listened to the reports of representatives from our regional offices. Our regional offices report that the situation in many areas is stabilizing. "In our baseline scenario, capacity is assumed to be gradually restored at the end of this year." NABIULLINA ON WESTERN SANCTIONS AGAINST BANKS "Our banking industry has been operating under sanctions now for several years. A significant number of banks have already been subjected to sanctions. All banks, who haven't been sanctioned yet, are ready for this development. We believe that, just as in the past, when there were several waves of sanctions, all banks will be able to adapt. This is especially true because the banking sector has enough capital and resilience. NABIULLINA'S ANALYSIS OF THE RUSSIAN BUDGET DIFFICIT "This is the first time that we have calculated our own possible trajectory for the structural budget deficit. It is possible that the actual trajectory will be different. Discussions are taking place in the government. Announcing the date of an announcement is expected to happen? in September or October. We have, however, projected that the primary structural deficit will be 2% of GDP this year. This will increase to 1% next year and then 0.5% in 2028. These are our estimates, which will be refined when the government releases its updated forecasts. "Our baseline forecasts include this trajectory." NABIULLINA DOWN STOCK MARK MARKET "There is no reason to be concerned about the financial stability of this situation. The stock market is experiencing a period where it's very volatile. I think that an important part of the issue is related to the increased uncertainty about the future financial performance and dividend policy of listed companies. We do not believe that there is a need to react to the risks of financial stability. "The circumstances and dynamics have changed dramatically since those times when additional measures really were needed." *NABIULLINA ON POSSIBLE RATE HIKE "We can't completely exclude the possibility of a rate increase. We will continue to pursue the necessary policy to get back to low inflation. If circumstances change, we will raise the rate as high as necessary. I also hope that the actions we take in 2014 as well as 2022, 2023-2024 will be clear on this issue. This is a totally different scenario than the baseline we currently use. This scenario includes additional, continuing supply-side shocks that are not?longer?temporary but reduce our production capacity on a long-term?basis. If our capacity was being permanently reduced, it would be necessary to have a more moderated economy this year as well as next year. "But, I'd like to stress once more, this isn't part of our baseline scenarios." *NABIULLINA ON?ATTACKS on WILDBERRIES warehousing and possible support "No, we do not consider any support measures because we think that the insurance industry as a sector is resilient enough." *NABIULLINA ?ON RISKS OF STAGFLATION "We have revised down our GDP projections. We have taken temporary reductions in production capacity into consideration. We assume that the capacity will slowly recover. In terms of this year's lower growth rates, between 0-1%, and?inflation, which is 6-7%: I don't think this term should be used arbitrarily as it can often be used as a fear tactic. Stagflation is characterized by a slowdown in the economy, a high rate of unemployment, and a high inflation, sometimes even an accelerating one. It is not caused by a tightening of monetary policy but rather a loosening, especially when resources are limited. So, I don't think we should talk about it. It is our monetary policies, which are aimed at reducing the inflation rate, that allow us to avoid a situation like this. Reporting by Vladimir Soldatkin and Marina Bobrova. Editing by Andrew Osborn
Investors worry that rising oil prices and yields may threaten the stock rally
The escalating conflict in the Middle East is sending oil prices soaring and Treasury yields to levels that are causing equity investors to be on edge. This has raised fears that the pain in the bond market, which was largely contained until now, could soon spread into U.S. stock markets. This week, oil prices reached $100 per barrel for the first since May. Investors were worried about global supply disruptions due to the near-halting of trade through the Strait of Hormuz. On Friday, oil prices fell to just under $100.
The Federal Reserve is worried that higher oil prices will lead to an increase in interest rates. This has pushed the yield of the benchmark 10-year U.S. notes to its highest level since 2025.
Some investors are worried about the short-term prospects for stocks. They have just begun to feel the heat.
Jack Ablin is the chief investment officer of Cresset Capital. He said, "I believe investors did a good job in shrugging off initial hostility... but at the end of tunnel optimism seems to be fading."
Ablin stated that the stock market would be negatively affected if the yield on the 10-year bond rose above 4.75 percent.
Investors use interest rates to determine what future company profit is worth now. Higher rates make future profits appear less valuable, reducing the appeal of stock.
Kristina Hooper, chief strategist for the Man Group and chief market analyst, is also worried about rates rising.
The rising rates could "very well" become a problem soon. The 30-year yield is at its highest level in many years. It could easily rise given the concerns about inflation, fiscal sustainability, and the ongoing war in the Middle East.
She said: "That does not mean we won't feel pressure before then. But to me, this is a level of psychological impact that can be quite significant."
CAPEX CALCULUS
The S&P 500 has reached new heights in early June, despite the fact that some investors were concerned. Investors have remained optimistic due to the solid earnings growth and outlook driven by AI related capital expenditure.
Matthew Maley is the chief market strategist of Miller Tabak + Co. He said that this will create some headwinds in the near future. Bond yields are not just a way to attract investment dollars, but they can also increase borrowing costs for companies and consumers. This slows the economy and weighs on stocks. Interest rates are rising as the market depends on hyperscalers for their ambitious capex plans.
"It will look different for the CEOs of the hyperscalers... Is it worth it to them to do the capital expenditure they planned if they are required to pay higher rates of interest to finance it?" Peter Graf, the chief investment officer of Amova Asset Management Americas, said:
Graf and others do not see this as an indication to sell stocks yet. Graf believes that expectations of Fed rate increases are too aggressive. Fed funds futures price in two rate hikes of 25 basis points by the end the year.
Graf stated, "I can't understand why the Fed would react hawkishly at this point and fuel the flames given that their view of the data is that it doesn't seem too bad."
Even at these levels, it is not clear that the earnings growth that has been the backbone of this stock market rally will be threatened.
Michael Purves is the chief executive of Tallbacken Capital Advisors. He said, "If you cannot make a convincing bear case that $100 gas and $4.50 oil will destroy earnings, it is hard to make one on the stock market." (Reporting and editing by Megan Davies, Daniel Wallis and Megan Davies; Additional reporting and editing by Gertrude Chavez Dreyfuss)
(source: Reuters)