European equities slipped on Monday as a Middle East military escalation pushed crude oil above $90 a barrel and traders raised bets on a Federal Reserve rate hike. Despite the pullback, the STOXX 600 still locked in its fifth straight monthly gain for August, even as France's CAC 40 headed for its first monthly loss in five months.
European markets turned defensive on the final trading day of August as crude oil futures jumped nearly 3% to trade near $90.60 a barrel after U.S. forces struck two Iranian rocket launchers on Larak Island in the Strait of Hormuz. Iranian forces retaliated by targeting U.S. military positions in Jordan, and the clash dampened hopes of a quick diplomatic fix for commercial transit through the strait.
The pan-European STOXX 600 Index fell 0.2% on the session, led by a nearly 1% drop in Germany's DAX. France's CAC 40 slipped 0.1%, and London markets were closed for a summer bank holiday. Yet the STOXX 600 still secured a 0.7% gain for August, marking its fifth consecutive monthly advance.
That resilient monthly run capped a stretch defined by solid corporate earnings, expanding tech supply-chain valuations, and robust disinflation trends that insulated continental equities against rising global bond yields. France's CAC 40, however, was headed for its first monthly decline in five months, dragged down by sell-offs in consumer goods and luxury heavyweights after disappointing earnings in China and the U.S.
Middle East strikes drive oil past $90
The sudden jump in crude prices reignited cost-push inflation anxieties across European industrial and transport sectors, even as it gave temporary buoyancy to integrated energy producers.
Fed hike odds surge ahead of heavy U.S. data week
Beyond the energy market friction, equity valuations faced renewed pressure as money markets recalibrated central bank rate paths after Federal Reserve Chair Kevin Warsh's hawkish address at the Jackson Hole symposium on Friday. Fed funds futures now price in a nearly 60% probability of a 25-basis-point rate hike at the Fed's Sept. 16 meeting, a sharp surge from the 35% odds implied before Warsh's speech.
Tuesday's July JOLTS report is expected to reinforce a low-hire, low-fire backdrop, followed by August ADP private payrolls on Wednesday and Friday's nonfarm payrolls report, which is projected to show a hiring recovery. Speeches by Fed Governors Michael Barr on Tuesday and Christopher Waller on Thursday will be parsed closely for signs of broader voting consensus behind Warsh's hawkish tone.
European rate curves reflect growing expectations of domestic monetary tightening ahead of upcoming Eurozone inflation data. The regional CPI release later this week is expected to confirm sticky core inflation, cementing market expectations for a 25-basis-point rate increase from the European Central Bank on Sept. 10.
In single-stock developments, Faroe Islands-based salmon producer Bakkafrost ASA dropped 6% after missing second-quarter operational earnings estimates, weighing on European food producer indexes.
Source: Investing.com
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