European stocks came under broad pressure while the energy sector bucked the trend to lead gains, as geopolitical tensions triggered a comprehensive repricing of rate hike expectations by the Bank of England and the European Central Bank.

⑴ On Tuesday, European stock markets generally declined amid the impact of US-Iran consecutive third night of military strikes, Trump’s announcement to restart the Hormuz Strait shipping blockade against Iran, and the imposition of a 20% transit fee on other passing cargo. The London FTSE 100 Index fell 0.5%, the German DAX dropped 0.55%, the French CAC slid 0.9%, while Italy and Spain stock indices closed down 0.7% and 1.07% respectively. However, energy giants BP and Shell were boosted by soaring oil prices and bucked the trend, recording gains of 3% and 1.7% respectively.⑵ Brent crude oil surged over 3% intraday, breaking above $86/barrel, marking the first time it has surpassed the $85 level since the ceasefire agreement. Dutch TTF natural gas benchmark contract rose nearly 3% to 52.8 euros per megawatt-hour, while the UK natural gas contract climbed 3.3% to 128.27 pence/therm, hitting a three-month high. Rising energy costs are now being strongly transmitted to the interest rate pricing system via inflation expectations.⑶ The currency market currently fully prices in a 25 basis-point rate hike by the Bank of England in September, with another possible hike before year-end. The European Central Bank is also fully priced to take the same magnitude rate hike in September, with expectations of a further rate hike in December accumulating. Earlier this month during the ceasefire, the market had priced in not even a single full rate hike for both central banks combined. The geopolitical risk premium has completely reshaped policy path expectations.⑷ On the data front, US CPI and Walsh’s congressional testimony are about to be revealed. BNY Mellon strategists warn that inflation data will remain highly volatile and the market will fluctuate accordingly. News that China’s crude oil imports fell sharply by 41.3% in June to a nearly ten-year low adds uncertainty to the demand side. If core inflation remains stickier than expected, the bond spreads of Europe’s peripheral countries may widen further, potentially reaching a critical threshold that triggers systemic hedging behavior.