OTP Morning Brief: Middle East escalation drove market movements on Wednesday
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OTP Morning Brief: The S&P pulled back from its record high on Friday, but ended the week in positive territory
European stocks closed slightly lower on Friday, snapping a four-week winning streak. The BUX presented a much more positive picture in terms of its weekly performance. The eurozone economy expanded by 0.4% quarter-on-quarter in Q2, supported by Spain’s outstanding performance. Major US indices also closed lower on Friday, but the week was largely positive overall. Investor sentiment continued to be weighed down by uncertainty in the Middle East and elevated oil prices. US Treasury yields rose and the dollar weakened following weaker-than-expected retail sales data. Japan's Q2 GDP growth fell short of expectations, while Asian equity markets moved higher. August purchasing managers' indices are due for release this week.
OTP Morning Brief: US rate cut expectations declined further despite the favorable producer price index data
The favorable July producer price index data led to a further decline in US rate cut expectations on Thursday. Markets are now pricing in a Fed rate cut only in December. Declining rate cut expectations provided a boost to US equities, with the technology-heavy Nasdaq posting the strongest gains among the major indices. Sandisk shares surged 13.7%. In Europe, major stock indices moved only modestly, with the STOXX 600 remaining broadly flat. The favorable US CPI data led to a decline in developed market government bond yields. Today, the second estimate of eurozone Q2 GDP is due for release, while additional July retail sales data will be published in the US.
The US-Iran conflict escalated again. President Donald Trump stated that the previous 14-point agreement had effectively come to an end. Energy prices recorded a sharp rise. Brent crude oil surged by 5.2%, while the price of European benchmark TTF natural gas climbed 4.1% on Wednesday. European equity indices fell sharply, led by Spain's IBEX. Russia banned diesel exports until July 31. The Hungarian Ministry of Finance commented on the state of the budget. Major US indices closed mixed, with the Nasdaq posting a modest gain, supported by a 4.8% advance in Broadcom shares. With CPI risks intensifying, both US and German 10-year bond yields moved higher.
The US-Iran conflict escalated again
Since Tuesday — when several cargo vessels may have come under Iranian attack — tensions between the US and Iran have escalated once again. The US initially carried out retaliatory strikes overnight on Tuesday, followed by Iranian attacks on US targets on Wednesday. According to reports, several cargo ships turned back while transiting the Strait of Hormuz. President Donald Trump stated that the temporary agreement aimed at ending the conflict had effectively collapsed, adding that the US is expected to launch further strikes. Against this backdrop, energy prices surged on Wednesday, with Brent crude oil rising 5.2% and European benchmark TTF natural gas advancing 4.1%.
Leading European equity indices extended their losses on Wednesday
Driven primarily by unfavorable developments in the Middle East, Western European stock markets fell sharply on Wednesday. The STOXX 600 declined 1.6%, while the DAX and CAC 40 each dropped 2.2%, and the FTSE 100 closed 1.7% lower. Spain’s IBEX was hit particularly hard, plunging 2.7% after President Trump instructed Treasury Secretary Scott Bessent to suspend all trade with Spain and described Madrid as a terrible partner. Basic materials companies, along with construction and building materials stocks, weighed most heavily on the benchmark index, falling 4.5% and 3.7%, respectively. Automotive shares also retreated 3.7%, while the rise in crude oil prices lifted the energy sector by 1.9%. Higher oil prices also put pressure on airlines, with Air France shares dropping 6.6% and Wizz Air stock falling 5.0%. Among individual stocks, Sweden’s Bahnhof soared 17.1% after telecom operator Telenor agreed to acquire a majority stake in the Swedish broadband provider.
In its updated forecast released yesterday, the IMF lowered its 2026 euro area growth projection by 0.2 percentage points to 0.9%, while leaving its 2027 forecast unchanged at 1.2%.
After Ukrainian drone strikes on Russian oil refineries caused significant damage, Russia banned diesel exports until July 31 in an effort to stabilize the Hungarian fuel market. Following the announcement, the European diesel crack spread (the price difference between diesel and Brent crude oil) surged to a record high of $60.17 per barrel.
Hungary’s central government budget posted a HUF 424.1 billion surplus in June, an exceptionally strong result for the sixth month of the year, which typically records a deficit. According to a statement from the Ministry of Finance, the budget deficit would have reached 8.3% this year without the change in government, but measures implemented so far – including the agreement with the EU – have reduced it to 7.5%. The ministry also announced that the government will amend the 2026 budget and set a new deficit target for 2026 by the end of August, while the 2027 budget and the medium-term fiscal plan will be submitted by the end of October. Finance Minister András Kármán stated that the Hungarian government does not have a specific exchange rate target, although exchange rate predictability remains crucial. He also reaffirmed the government’s commitment to reducing the budget deficit below 3% of GDP by 2030.
Regional indices outperformed their Western European peers. The BUX declined 0.6%, while the PX50 fell 0.8%, and Poland’s WIG20 remained broadly unchanged. The National Bank of Poland left its benchmark interest rate unchanged at 3.75%.
Major US indices closed mixed, thereby outperforming Europe
On Wednesday, the S&P 500 fell 0.3% and the Dow Jones declined 1.1%, while the Nasdaq Composite managed to rise 0.2%. Microsoft and Alphabet each lost more than 1% of their value, while Meta Platforms weakened by 2%. The Nasdaq, however, remained in positive territory thanks to Broadcom, which advanced 4.8% after Apple announced plans to spend more than $30 billion as part of the chip supply agreement signed earlier this week. Nvidia rose 3.65% after reports suggested that China plans to allow its leading artificial intelligence companies to purchase limited quantities of Nvidia H200 chips.
According to the minutes of the Federal Reserve’s meeting last month, concerns about CPI strengthened among policymakers. One new issue raised during the discussion was the potential inflationary impact of extremely rapidly growing investment in artificial intelligence. Participants generally assessed that information received between meetings suggested that upside risks to price stability remained significant, while downside risks to achieving maximum employment had eased somewhat. Based on FedWatch data, market pricing currently indicates that one interest rate hike is the most likely outcome this year (36.9%), although the scenario of two rate hikes has also gained considerable ground (35.1%).
While the IMF lowered its 2026 global growth forecast by 0.1 percentage point to 3.0% and raised its 2027 projection to 3.4%, it continues to expect US GDP growth of 2.3% in 2026, while increasing its 2027 US forecast by 0.1 percentage point to 2.2%.
With CPI risks intensifying, both US and German 10-year bond yields moved higher
The renewed escalation of the Middle East conflict strengthened upside CPI risks globally, prompting a rise in developed market bond yields. The US 10-year Treasury yield increased by 3.8 basis points to 4.57%, while the German 10-year yield rose by 10.1 basis points to 3.09%. The yield on the 10-year Japanese government bond climbed 2.5 basis points to 2.865%, its highest level since September 1996. EURUSD remained near the 1.141 level.
The forint opened the day weaker amid the impact of the Middle East conflict and ultimately ended the session down 1.1% against the euro. Hungarian government bond yields rose by more than 10 basis points at maturities beyond one year, with the 10-year yield increasing by 13 basis points to 5.16%. Today, the Government Debt Management Agency (ÁKK) will offer HUF-denominated bonds worth HUF 20 billion, HUF 20 billion, and HUF 25 billion in 3-year, 5-year, and 10-year maturities, respectively.
Today's highlights
Asian indices were mixed as trading approached the close. The Nikkei rose 1.6%, while the KOSPI gained 0.1%. Meanwhile, the SSEC declined 0.5% and the Hang Seng fell 0.8%.
Today, we expect Germany’s May export data and the minutes of the ECB’s June rate-setting meeting from Europe. In the US, the usual weekly jobless claims data and June existing home sales figures will be released.
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