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European Bond Yields Rise as ECB Hike Bets and Mideast Tensions Mount
European government bond yields rose on Monday, snapping a two-day rally as markets braced for further monetary tightening from the European Central Bank and digested the inflationary impact of rising geopolitical risk in the Middle East.
ECB Hike Expectations Dominate
Money markets are now almost fully pricing in a 25-basis-point interest rate hike at the ECB's policy meeting this Thursday, according to Investing.com data. This hawkish sentiment follows preliminary August inflation figures for the Eurozone, which showed the headline consumer price index (CPI) accelerating to 3.3% year-on-year.
The increase was driven largely by a 14.3% surge in energy prices, even as core inflation, which strips out volatile components, eased slightly to 2.4%. In response, benchmark borrowing costs remained elevated, with Germany's 10-year Bund yield hovering near 3.36%.
Geopolitical Tensions Fuel Inflation Fears
Adding to market pressure, crude oil prices extended a recent rally after Iran announced plans to declare a restricted zone near the Strait of Hormuz. The move follows a military exchange over the weekend where U.S. forces struck Iranian oil tankers, according to reports.
AdBrent crude, the international oil benchmark, rose past $90 a barrel, building on a nearly 10% gain from the previous week. The potential for disruption in the Strait of Hormuz, a chokepoint for about 20% of global seaborne oil, has reignited concerns about cost-push inflation across Europe.
Market Impact and Outlook
The combination of higher bond yields and energy prices weighed on European equities. The pan-European STOXX 600 index edged down 0.1%, with rate-sensitive sectors such as real estate and construction under pressure.
Investors are also looking ahead to a critical U.S. CPI report later this week. The inflation data will be a key factor for the Federal Reserve's upcoming policy decision on Sept. 15-16, particularly after a stronger-than-expected U.S. jobs report for August.
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