Soaring oil prices combined with widening divisions within the Federal Reserve are pushing global equities into a highly sensitive window. According to the latest analysis from Barclays, the recent surge in oil and European natural gas prices is reigniting inflation and interest rate risks, and with the support from the second-quarter earnings season fading, markets are once again being driven by macroeconomic factors.

However, Barclays also points out that markets have already priced in a substantial degree of hawkish expectations, with the probability of a Fed rate hike in September currently reflected at roughly two-thirds. As signs of an economic slowdown emerge in the United States, the current policy trade could still reverse if upcoming employment and inflation data weaken.

As a result, tonight's Non-Farm Payrolls report and next week's CPI figures will be crucial in determining the market's next directional move. If data comes in below expectations, markets could pivot back to pricing in economic cooling and lower interest rates; conversely, if inflation continues to exceed forecasts, the combination of rising oil prices and tighter monetary policy will continue to weigh on risk assets.

Meanwhile, another potential theme is emerging in European markets: the Russia-Ukraine situation. Barclays believes that if ceasefire negotiations make meaningful progress, energy prices, interest rates, and geopolitical risk premiums could fall in tandem, paving the way for a valuation re-rating in European cyclical stocks, particularly in the German market.

Hawkish Bets Already Priced In — Jobs Report and CPI Will Determine Whether a 'Reversal' Occurs

The rapid rise in oil and European natural gas prices has once again become a major disruptive factor for global equities. Barclays notes that European TTF natural gas prices have climbed to their highest levels since early 2023, and rising energy costs are not only pushing up inflation expectations but also suppressing equity valuations through higher bond yields.

At the same time, Warsh's hawkish remarks at the Jackson Hole symposium have further reinforced tightening expectations. Markets are currently pricing in roughly a two-thirds probability of a Fed rate hike in September, and Barclays economists even anticipate one rate hike each in September and December this year, with the European Central Bank also potentially raising rates again this month.

But Barclays argues that hawkish expectations themselves have already been largely priced into the market. Against a backdrop of slowing US economic activity, if subsequent data fails to strengthen rate hike expectations further, the rates trade could instead see a reversal.

Therefore, the upcoming employment and inflation data will be especially critical. The US August Non-Farm Payrolls report and the August CPI due next week will directly test whether the current hawkish pricing can continue to be revised upward. If the data comes in significantly below expectations, rate pressures could ease, and equity valuations may get a breathing window.

Among the key releases, the August PPI is scheduled for September 10, with market expectations of a 0.4% month-over-month increase, versus a prior reading of 0%; the August CPI is due on September 11, with expectations of a 0.4% month-over-month rise, compared to the prior 0.1%.

Beyond Oil: Russia-Ukraine Situation Could Open a 'Valuation Re-rating' Window for European Markets

Rising energy prices are interrupting the previous sector rotation in European equities. Barclays points out that while European natural gas prices remain far below the extreme levels seen during the initial Russia-Ukraine conflict in 2022, the recent uptrend is once again putting pressure on European stocks, particularly energy cost-sensitive cyclical sectors.

However, there is also a potential upside catalyst for European markets — a Russia-Ukraine ceasefire. Barclays believes that if negotiations achieve credible and meaningful progress, the impact would extend beyond geopolitics; energy prices and inflationary pressures could also decline in tandem, dragging European bond yields lower.

This would deliver a double boost to European equities: lower energy costs improving corporate earnings, while narrowing risk premiums drive valuation recovery. Among these, the German market's resilience could be especially pronounced.

By sector, autos, materials, and other energy-intensive industries stand to benefit directly from lower energy costs, while industrial and infrastructure sectors may begin pricing in post-war reconstruction expectations for Ukraine ahead of time. Conversely, defensive sectors such as energy and utilities could face relative pressure.