Escalating conflict in the Middle East has driven up oil prices and inflation expectations. The yield on Germany's benchmark ten-year government bond rose by 4 basis points to 3.03%, breaking above the 3% level for the first time in nearly a month.
The more policy-sensitive two-year yield jumped as much as 6 basis points to 2.65%. Selling pressure was even more severe for French ten-year bonds, which underperformed their German and Italian counterparts by up to 2 basis points.
This reflects heightened market uncertainty over France's political outlook following the announcement by far-right leader Marine Le Pen that she will run in next year's presidential election.
On July 7th local time, the US Central Command issued a statement and video confirming that US forces had completed a new round of offensive strikes against Iran, using precision-guided munitions to hit more than 80 targets.
The action was described as a direct response to recent Iranian attacks on commercial vessels transiting the Strait of Hormuz. The statement specified that the strikes targeted Iranian air defense systems, command and control networks, coastal radar sites, and anti-ship missile capabilities.
Additionally, over 60 small boats of Iran's Islamic Revolutionary Guard Corps were destroyed in and around the Strait of Hormuz.
The US military stated that Iran had previously attacked three commercial ships passing through the strait: the Marshall Islands-flagged tanker "Al Rekayat", the Saudi Arabian-flagged tanker "Vedian", and the Liberian-flagged tanker "Cyprus Prosperity".
The US Central Command declared that its forces remain on high alert, ready to hold Iran accountable at any time should it fail to comply with or violate agreements.
On July 8th, Iran's Islamic Revolutionary Guard Corps issued a statement asserting that US airstrikes that morning against some coastal bases and non-military facilities in Iran's Hormozgan province and Mahshahr violated the ceasefire and breached the Islamabad Memorandum of Understanding.
The IRGC claimed to have struck 85 US targets in Bahrain and Kuwait in retaliation for the US breach of the ceasefire. Military advisor to Iran's Supreme Leader, Rezaei, stated that the US is prepared to launch further attacks, and that Iran is fully ready to respond.
Iran's Khatam al-Anbiya Central Headquarters declared that it will deliver a firm response to the US strikes and reiterated that US interference in the management of the Strait of Hormuz is unacceptable under any circumstances.
Furthermore, on July 8th, US President Trump stated at a NATO summit that he believes the US-Iran Memorandum of Understanding "is over."
The renewed exchange of attacks has pushed Brent crude futures up by nearly 6% to $78.43 per barrel. The renewed surge in oil prices has stoked fresh concerns that inflation may remain elevated for longer than anticipated.
The money markets currently price in an approximately 80% probability of the European Central Bank implementing another 25-basis-point rate hike in September, following its June increase.
Markets have fully priced in one more ECB rate hike by year-end and lean towards expecting another hike by mid-next year. ECB Executive Board member Isabel Schnabel noted earlier this week that supply chain pressures remain elevated.
Other policymakers have also observed that price pressures continue to manifest and could further push up wages, food, and service costs in the coming months.
Camille de Courcel, Head of European Developed Market Rates Strategy and Economic Research at BNP Paribas, commented, "This perfectly illustrates why central banks must remain highly vigilant."
She added that market expectations for another ECB rate hike this year are "quite strong," as by the time of the September policy meeting, more evidence regarding second-round inflation effects may have emerged, prompting the ECB to act.
Comments