Stocks slide and Brent reaches $102 as markets price another Fed rate hike

Global equity markets retreat on rate and oil pressures

United States and European stock benchmarks retreated on Wednesday as persistent energy price pressure and expectations of further central bank tightening weighed on investor sentiment. The Dow Jones Industrial Average dropped 0.7% to finish at 51,511 points, while the broader S&P 500 slipped 0.75% to 7,706 points. Tech stocks pulled the Nasdaq down 1.1% to 26,936 points following two consecutive record sessions, led lower by Alphabet and Amazon. In Frankfurt, the DAX closed 0.7% lower at 25,411 points, trimming its weekly gain to 0.4%, with Allianz falling 3.7% and Scout24 declining 4.6% against gains of 3.1% for Rheinmetall and 2.3% for SAP. S&P 500 valuations traded at nearly 19 times forward earnings, marking the lowest multiple since 2023 according to LSEG data.

Energy supply disruptions and Middle East tensions

Crude benchmarks remained elevated as the conflict between the United States and Iran disrupted maritime traffic through the Persian Gulf. Brent crude for November delivery gained 3.7% to settle near $102.8 per barrel after another commercial vessel came under fire in the Strait of Hormuz. Bank of America estimated that throughput losses through the strait previously reached 14 million barrels per day before averaging 4 to 8 million barrels per day, warning that Brent could exceed $150 per barrel if infrastructure damage worsens. The bank raised its year-end Brent projection from $83 to $95 per barrel while anticipating an average of $80 for 2027. Supply pressures were partially eased after Saudi Arabia restarted operations on its East-West Pipeline to the Red Sea, bypassing regional chokepoints, while Iraq announced plans to raise export volumes.

Central banks weigh monetary tightening

Strong economic indicators coupled with high energy costs have reinforced expectations of tighter monetary policy across leading central banks. S&P Global reported that preliminary purchasing managers indexes showed United States business activity in September reached its highest level in more than five years. The yield on two-year United States Treasuries reached its highest level since 2024, while ten-year yields touched levels unseen since 2007. CME Group FedWatch pricing indicated a 71% probability that the Federal Reserve will raise borrowing costs again in October, following its first rate increase in over three years. Speaking at a regional reserve conference in Chicago, Federal Reserve Governor Michael Barr addressed the inflation outlook.

In my baseline scenario, further policy adjustments are likely to be needed to bring inflation back to target in a timely manner.

In Europe, European Central Bank interest rates stand at 2.5% following recent adjustments. Bundesbank President Joachim Nagel stated in London that prolonged energy inflation could require additional intervention.

I cannot rule out that we will have to move into a mildly restrictive monetary policy stance if energy prices remain high.

German growth upgrades and Washington diplomatic summit

Domestic economic research institutes in Germany raised their joint autumn gross domestic product projections to 1.3% for 2026 and 1.1% for 2027, up from April estimates of 0.6% and 0.9% respectively. The institute group, which includes the Halle Institute for Economic Research (IWH), forecasts that expansion will moderate to 0.4% in 2028. The IFO Institute projected 1.4% growth for 2026, while economists anticipate the September IFO Business Climate index will rise 0.2 points to 89.0 points. Concurrently, diplomatic attention shifted to Washington, where United States President Donald Trump is scheduled to host Chinese President Xi Jinping for a three-day summit addressing sectoral tariffs, fentanyl enforcement, artificial intelligence rules, and military dialogue.