Global Markets Turmoil as Middle East Conflict Drives Oil and Borrowing Costs Higher

Global oil prices and government bond yields have surged following an escalation in the conflict between the United States and Iran and advances by Houthi rebels in Yemen. Brent crude oil prices climbed above $105 per barrel, with some reports placing the price as high as $107 to $110. The price spike follows the effective closure of the Strait of Hormuz and the seizure of the strategic port city of Mocha by Iran aligned Houthi forces, which threatens alternative shipping routes for Saudi Arabian crude exports.

These energy shocks have triggered a global sell off in government bonds, driving yields to their highest levels since 2007 in the US and UK. Investors fear that rising energy costs will accelerate inflation, forcing central banks to tighten monetary policy. The European Central Bank has already raised interest rates to 2.5 percent, warning that inflation will remain above target for an extended period. Attention now turns to the US Federal Reserve, which meets next week. While the Fed has held rates between 3.5 percent and 3.75 percent for five meetings, analysts and traders suggest a high probability of a rate hike, pending a consumer inflation report due Friday.

President Donald Trump has pressured the Federal Reserve to lower rates, describing the board as needing to be patriots. He suggested the conflict with Iran might not end until after the November midterm elections. To address the affordability crisis, Trump promised a $5,000 dividend to every American adult if Republicans retain both chambers of Congress.

In the UK, the surge in wholesale gas prices, which rose above 200p per therm, is expected to increase household energy bills. While the Bank of England is widely expected to keep rates at 3.75 percent for now, the rise in government bond yields is increasing the cost of borrowing for the UK government and potentially affecting fixed rate mortgages for consumers.