Rising risks of a further escalation in the conflict between the United States and Iran have prompted traders to maintain a cautious stance. Markets are now firmly pricing in three separate 25-basis-point interest rate hikes by the European Central Bank. This contrasts with market expectations reflected at the close of trading last Thursday, which anticipated a total increase of approximately 69 basis points.
This hawkish repricing is occurring as European natural gas futures have climbed more than 1%, and the June Brent crude oil futures contract is trading within $1 of its post-conflict peak. Since the outbreak of hostilities, Iran has not permitted a single liquefied natural gas (LNG) vessel to transit the Strait of Hormuz, exacerbating supply shortages in the energy market. Adding to the hawkish sentiment, European Central Bank Governing Council member Sleijpen noted that the bank will discuss the necessity of an interest rate hike during its April meeting.
With a lack of major scheduled events in Europe, markets are likely to remain in a wait-and-see mode ahead of the deadline set by US President Trump. Markets have grown accustomed to Trump repeatedly extending deadlines to continue negotiations, and today may follow a similar pattern. While a potential shift by Trump towards advocating for the reopening of the Strait of Hormuz could offer some comfort to markets, the tail risk of a substantive escalation in the US-Iran conflict is expected to keep traders in a cautious posture.
This sentiment is also evident in European morning bond trading, where German government bond yields are rising across the curve by 2 to 3 basis points. However, research suggests that the global adjustment in yields may be "excessive."
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