Wall Street took Monday off for Labor Day, but European markets were very much awake, even if the major indices barely moved. The calm headline numbers masked a day of political shockwaves, surging commodity prices, and a bond market that's getting increasingly nervous.
The big story came out of Germany, where the far-right AfD party secured a landslide victory in the eastern state of Saxony-Anhalt. It's the party's first major state-level win since the Second World War, a political earthquake that sent ripples through the country's establishment. The AfD captured roughly 44% of the vote, falling short of an absolute majority but still handing Chancellor Friedrich Merz's CDU its worst-ever result in the state since reunification.
Markets reacted in the way they usually do to political uncertainty: yields went up. Germany's 10-year Bund yield rose about 5 basis points to 3.39%, inching closer to the 15-year high of 3.3951% set just last week. Italy's 10-year yield climbed 7 basis points to 4.22%, France's added 4 basis points to 4.25%, and the UK's 10-year gilt rose 4 basis points to 5.18%. Even the shorter end felt the pressure, with the German 2-year yield gaining 6 basis points to 3.00% and the 30-year rising 4 basis points to 3.85%.
Meanwhile, the geopolitical pot kept boiling. Brent crude pushed above $97 a barrel after the US struck three Iranian oil tankers over the weekend, destroying one. Tehran responded with a threat to create a new restricted zone outside the Strait of Hormuz, warning ships they'd face strike risk near Oman's Khasab. The Financial Times also reported that a Saudi Aramco facility was hit in the fresh strikes. WTI crude rose 1.8% to $93.10 a barrel, extending its month-to-date gain to 13.4%, while Brent added 1.4% to $97.63.
The energy squeeze isn't just about oil anymore. European natural gas jumped 2.1% and is now up a whopping 20.8% on the month. That's a cost pressure that's going to be hard for the European Central Bank to ignore as it meets later this week.
In metals, copper stole the show, surging to an all-time high above $14,530 a ton on the London Metal Exchange. The COMEX contract was up 0.5% at $6.63 a pound. Gold slipped 0.4% to $4,415 an ounce, while silver added 0.5% to $66.30.
The ECB is widely expected to deliver a 25-basis-point rate hike on Thursday, its second of the year. With eurozone inflation running at 3.3% in August against a 2% target, traders are pricing in roughly a 90% probability of another hike by year-end. Across the Atlantic, markets are also leaning toward a Federal Reserve hike after August nonfarm payrolls came in at a surprisingly strong 162,000, well above expectations near 56,000. Friday's US CPI report is now the week's decisive print.
