Crude futures posted solid gains at the start of the trading week, rising as much as 3%, as geopolitical tensions in the Middle East prompted the shutdown of a key Saudi pipeline and fueled fresh inflation worries. Market expectations are running high that the US Federal Reserve will implement an interest rate hike at its Wednesday policy meeting, a scenario that is concurrently pressuring Asian technology stocks and lending support to the US dollar.
In Europe, most equity benchmarks traded lower by midday, though London’s FTSE 100 managed to buck the trend and advance. The UK index received a boost from strength in heavyweight oil companies like Shell and BP, whose share prices rallied on the back of higher crude, and was also aided by the index’s relatively low exposure to the tech sector.
A "double whammy" of rising oil prices and escalating warnings from tech leaders about the risks of artificial intelligence is unnerving investors. Dario Amodei, the CEO of AI firm Anthropic, became the latest voice to urge caution, calling on companies over the weekend to slow the pace of AI development to better understand the potential dangers. He emphasized that managing these risks requires greater prudence.
Russ Mould, investment director at AJ Bell, captured the market mood, noting that these two factors are creating a difficult environment. “Oil prices and AI risk are a double headache for investors,” he said. “Bond yields are moving up again, and the momentum behind the equity market rally is fading.” He added that persistently high US CPI data had already stoked inflation anxiety the previous week, and the current situation is compounding those concerns.
Both major crude benchmarks were trading above $100 per barrel and pushing higher following the shutdown of Saudi Arabia’s key East-West pipeline after a drone attack by Yemen’s Houthi rebels, alongside an incident involving a commercial vessel in the Strait of Hormuz. The Houthis have been tightening their grip on the Bab el-Mandeb strait, a crucial shipping lane connecting Europe and Asia.
Where to begin
The average US diesel price has soared to $6.23 per gallon, having first breached the $6 mark last Friday. This surge presents a political challenge for former President Trump, who has pledged to introduce measures to alleviate economic pressure ahead of the November congressional midterm elections. Official data released last week showed US inflation remains stubbornly above the Fed’s 2% target.
According to Chris Weston, an analyst at Pepperstone, “Market pricing indicates a 92% probability of a Fed rate hike, with expectations of 50 basis points of cumulative tightening by the end of the year.” The anticipation of a global tightening cycle—following the European Central Bank's hike last week—is weighing on stock markets, particularly hitting technology firms that rely heavily on debt to fund massive AI research and development budgets.
The sell-off was pronounced in Asia. Tokyo-listed tech giant SoftBank tumbled more than 10% on Monday, and chipmaker Kioxia fell over 6%. In South Korea, SK Hynix and Samsung Electronics saw significant losses, while Taiwan's TSMC also dropped sharply.
Key market snapshot
Brent crude: +3.0% at $107.71 per barrel
WTI crude: +2.9% at $102.90 per barrel
London FTSE 100: +0.7% at 10,727.07 points
Paris CAC 40: -0.8% at 8,118.23 points
Frankfurt DAX: -0.5% at 25,439.34 points
Tokyo Nikkei 225: -0.8% at 63,492.99 points (close)
Hong Kong Hang Seng Index: +0.5% at 24,917.60 points (close)
Shanghai Composite: -0.1% at 3,885.33 points (close)
Currency markets: USD/JPY up at 154.66 (from 153.71 last Friday), EUR/USD down at 1.1542 (from 1.1596), GBP/USD down at 1.3481 (from 1.3527), EUR/GBP down at 85.60 pence (from 85.73).