Oil prices slump despite heightened Middle East uncertainty

An indecisive start for European equity markets has seen the region struggle for a definitive direction despite another upbeat session in Asia overnight. The recent decline seen for Spanish, French, and German inflation figures provided the basis for today’s eurozone CPI metric, with the 1.8% figure representing the first sub 2% reading since mid-2021. Markets have since adjusted to now expect an October cut, which not long ago had been penciled in to account for the fact that both the BoE and FOMC will not hold a monetary meeting this month. Nonetheless, inflation remains sticky within the core elements, with the disparity between headline and core CPI widening across the eurozone, US, and UK.

All eyes turn towards the US ISM manufacturing PMI release today, with the substantial risk-off moves seen following the past two releases bringing heightened caution for traders. The uncertainty around a potential US recession will always be more prominent when looking at the manufacturing sector, although there is a strong chance that this is simply an industrial recession rather than a country-wide one. Today also brings a raft of comments from Federal Reserve members, coming in the wake of a Powell appearance that appeared to take a somewhat calm tone. With markets seeking to pour through each fresh data point with a view to understanding the likeliness of a second consecutive 50bp rate cut, we have started to see a more cautious approach grow where 25bp is now the base case scenario. With the US election around the corner, and the Fed having already kicked off with a strong initial cut, there is a strong chance that they settle into a groove of 25bp cuts in the absence of any particularly concerning deterioration in US data.

Oil prices have provided the biggest mover in early trade, with WTI losing 2% in just two-hours despite the heightened geopolitical risk attached to the Israeli ground offensive in Lebanon. With OPEC reconvening once again this week, there is a fear that we are set for a fresh reminder of the worsening supply situation in the event that the group raise production in December as planned. Recent rumours have been circulating that Saudi Arabia want to reestablish their position by taking back market share from the US, and thus markets will be watching closely for any indication of future output. For markets, the continued weakness seen in energy markets does help depress inflation expectations, although traders will also be wary of the reflection this has on global economic activity.