Europe wants lower oil prices to limit Russia’s military action.

At the end of Monday, the Dow Jones Index (US30) was up 0.86%. The S&P 500 Index (US500) added 0.16%. The Nasdaq Technology Index (US100) fell by 0.30%. Investor sentiment worsened as Treasury yields rose, driven by expectations of a Fed rate cut this year and concerns about potential inflationary pressures from the incoming Trump administration’s policies. The technology and communication services sectors were the worst performers, while energy excelled thanks to higher oil prices following the imposition of new US sanctions against Russia. 

Equity markets in Europe were mostly down on Monday. Germany’s DAX (DE40) fell by 0.41%, France’s CAC 40 (FR40) closed down 0.30%, Spain’s IBEX 35 (ES35) lost 0.28%, and the UK’s FTSE 100 (UK100) closed negative 0.29%. Rising natural gas prices in the Eurozone have renewed fears of rising inflation in the bloc, while hawkish Fed rates continue to be supported by high inflation and a strong labor market.  

UK 10-year Gilts yields continue to rise as investors lowered expectations for a Bank of England (BOE) rate cut in 2025 due to lingering concerns over inflation and economic uncertainty. Traders lowered their prognoses for a rate cut to 43 basis points by December 2025, down from the 50 basis points expected on Friday. The change came ahead of the release of UK inflation data, which is expected to show the annual inflation rate unchanged at 2.6%, while the core rate fell slightly to 3.4%

WTI crude prices fell to $78.4 a barrel on Tuesday but remained near four-month highs as tougher US sanctions on Russia’s energy industry threatened to cut global supplies. The restrictions have affected major producers and hundreds of ships and tankers, forcing key buyers such as India and China to seek alternative sources. There are already early signs of disruption, with a senior Indian official saying ships hit by the sanctions will be barred from unloading and Chinese buyers rushing to secure quick oil supplies from the UAE and Oman. On Monday, six European countries urged the EU to lower a $60-a-barrel price cap on Russian offshore crude and refined products to curb Russia’s military action in Ukraine. However, weakening demand from China could offset the effect of supply cuts.

Asian markets were declining yesterday. Japan’s Nikkei 225 (JP225) fell by 1.05%, China’s FTSE China A50 (CHA50) declined 0.29%, Hong Kong’s Hang Seng (HK50) lost 1.00% and Australia’s ASX 200 (AU200) was negative 0.23%. 

The Australian dollar strengthened towards $0.62 on Tuesday, building on the previous session’s gains as the rally in the US dollar and Treasury yields paused. The Aussie was also supported by strong trade data from China, Beijing’s efforts to stabilize the yuan, and rising commodity prices. However, other data showed that consumer confidence in Australia declined for the second consecutive month in January, likely in response to the weakening of the Australian dollar against the US dollar. Markets are now pricing in a 67% probability that the Reserve Bank of Australia (RBA) will cut its 4.35% monetary rate by 25 basis points in February, and are fully factoring in the possibility of a rate change in April.

India’s annualized inflation rate for December 2024 eased to 5.22% from 5.38% in the previous month, broadly in line with market expectations of 5.3%, and remains within the RBI’s target of within 2 percentage points of 4%. On a month-on-month basis, retail prices in India fell 0.52%, the sharpest monthly decline in more than a year.