Fed raises rates, Europe with fewer gas supplies

Between Wednesday and Friday, markets experienced one of the most tense periods in recent weeks. The common thread was the return of inflation risk, fueled by oil prices still above $100 , the war in the Middle East, and a Federal Reserve that had once again raised interest rates. The result was a rapid repositioning between stocks, bonds, currencies, and precious metals, with often opposing movements within a few hours.

The Fed changes the picture again

The key news came from Washington. The Federal Reserve raised interest rates by 25 basis points , bringing the Fed Funds corridor to 3.75%-4.00% . It was the first hike since 2023, and, more importantly, the message following the decision suggested that the tightening might not be over. For investors, the key issue wasn't the hike itself, which was widely expected, but rather the confirmation that the central bank still believes price pressures are insufficiently contained.

Wall Street's reaction was immediate. The Dow Jones lost 1.21% and the S&P 500 0.45% , while the Nasdaq essentially held firm. The most significant move, however, came from the bond market: the yield on the 10-year Treasury note reached 5% , a particularly significant psychological threshold after years in which the stock market had benefited from a much lower cost of capital.

A government yield of this magnitude changes the entire valuation equilibrium. Bonds return to offering high nominal returns without the risk typical of equities, while financing costs for companies increase and the present value of future earnings declines. This is especially problematic for growth stocks, whose prices incorporate a significant portion of expected profits in the coming years.

Strong dollar, gold under pressure

The Fed's new stance immediately supported the dollar, buoyed by rising US yields and the prospect of tighter monetary policy. This trend also had direct consequences for US dollar-denominated commodities, making them more expensive for international investors.

Gold is perhaps the most obvious example. Before the Fed's decision, the precious metal had managed to surpass $4,365 an ounce , supported by demand for protection against geopolitical risk. After the rate hike, however, the movement quickly reversed, and prices fell towards $4,240 .

The movement neatly sums up investors' dilemma. On the one hand, gold continues to benefit from international uncertainty and energy tensions; on the other, higher real yields increase the opportunity cost of holding an asset that doesn't earn coupons or interest. At this stage, therefore, the precious metal finds itself torn between two opposing forces.

Europe approaches winter with less gas

The second major theme remained energy. Europe is approaching the winter season with unusually low gas inventories: European Union storage facilities are approximately 67% full, well below the 80% target set for December. Germany also has exceptionally low storage levels for the period.

Fragility also stems from the reduction in LNG flows from the Gulf. The conflict with Iran and severe restrictions on navigation through the Strait of Hormuz have hampered exports from Qatar and the United Arab Emirates, making Europe more dependent on cargoes available on the international market.

The risk, in the event of a harsh winter, extends beyond utility bills. A further increase in gas prices would impact industrial costs, electricity generation, and ultimately inflation, further complicating the ECB's work. Europe therefore remains particularly vulnerable to a prolonged energy shock, especially compared to the United States, which has a more favorable energy structure.

Geopolitical risk spreads to Saudi infrastructure

Although oil corrected during the trading sessions, the market continues to trade at very high levels. Prices remain close to the $100 threshold, signaling that a significant portion of the geopolitical premium has not been absorbed.

The situation has been further complicated by the spread of tensions to Saudi energy infrastructure. Attacks attributed to groups aligned with Iran have damaged the East-West Pipeline, the pipeline that runs through Saudi Arabia and transports crude oil to the Red Sea, bypassing Hormuz. In recent months, the pipeline had moved several million barrels a day, becoming one of the main safety valves in the global oil market.

The consequence is that risk is no longer concentrated solely in the Strait between Iran and Oman. Overland routes and the Red Sea have also become crucial to supply continuity, making it more difficult for operators to bet on a rapid normalization of energy prices.

Wall Street rebounds, but relief remains fragile

After the initial negative reaction to the Fed, the US market showed remarkable resilience. The decline in oil prices and the temporary decline in bond yields favored a return to buying, especially in technology: the Nasdaq gained 1.69% and the S&P 500 1.14% .

The rebound, however, hasn't erased the underlying problem. As long as the 10-year Treasury continues to hover around these high levels and oil remains near triple digits, the market will face an unfavorable mix: high cost of capital, persistent inflationary pressures, and less visibility on the path of monetary policy.

Europe remains the weakest link

The fragility was even more evident on European stock markets. On Friday, the STOXX 600 lost 1.1% , with the auto sector down around 3.4% . Volkswagen's profit warning boosted sales, but the move also reflects the broader vulnerability of the European economy to the combined effects of expensive energy, weak demand, and high interest rates.

The picture emerging from the three days thus shows markets less willing to ignore inflation. The Fed has brought rates back to center stage, oil continues to transmit geopolitical risk to prices, and Europe faces the approaching winter with tight energy margins.

Wall Street's rebound demonstrates that risk appetite has not disappeared, but remains primarily dependent on two variables: bond yields and energy costs . As long as both remain elevated, volatility is unlikely to be over.