Global Stocks Slip as Oil Surge and Political Risk Weigh on Markets

Stocks drifted lower Monday as escalating conflict in the Middle East and growing political uncertainty in Europe kept investors cautious ahead of key U.S. inflation data due later this week. Tensions rose further after Tehran announced plans for a restricted zone near the Strait of Hormuz, following American strikes on Iranian tankers and missile attacks launched by Iran’s Revolutionary Guard against U.S. Navy vessels. Brent crude climbed to $97 a barrel, its sharpest single day gain in seven weeks, extending a rally that has pushed prices roughly 35% higher since the conflict began earlier this year. Diesel prices, critical for transportation and manufacturing, have also hit record highs.

Central Banks Prepare to Respond

With energy and food costs climbing worldwide, markets increasingly expect central banks to raise interest rates. The European Central Bank is widely expected to lift rates to 2.75% this week, with a strong chance of a further increase by year-end. The Bank of Japan is also seen as likely to raise rates later this month. A JPMorgan economist noted that central banks had shown patience throughout the energy shock but are now shifting toward tightening policy. In the U.S., a stronger-than-expected jobs report has raised the odds of a Federal Reserve rate hike later this month.

Political Shifts Add Pressure on the Euro

The euro edged slightly higher but remains under pressure following political developments in Europe, including a strong showing by a far right party in German state elections and rising support for a similar political movement in France ahead of next year’s presidential race. Analysts warn that continued political shifts across major European economies could weigh on the currency’s stability in the years ahead. The euro remains the weakest performing major currency this year, while the Japanese yen has strengthened on rate-hike expectations, and global stock markets showed modest declines amid the uncertainty.