Rising Stagflation Pressures Driven By The Oil Surge Trigger A Sell-Off In Both Equities And Bonds

Wall Street’s Friday close highlighted mounting stagflation concerns as Brent crude’s rally above $116 per barrel, fueled by escalating Middle East tensions, triggered simultaneous selling across both equities and government bonds. By the end of the session, the Dow Jones (US30) fell 1.23% (while still posting a 0.46% weekly gain). The S&P 500 (US500) declined 0.52% (-1.03% for the week), while the Nasdaq (US100) finished marginally below its opening level (-1.97% on a weekly basis).

The coming week is shaping up to be a pivotal point in the macroeconomic calendar, bringing together geopolitical risks, major corporate earnings releases, and policy decisions from leading central banks. Recent US economic data continue to highlight a stagflationary dilemma. Third-quarter GDP growth is expected to accelerate to 3.0%, while headline PCE inflation is projected to rise 0.5% month-over-month, reinforcing the Federal Reserve’s hawkish stance. While markets assign roughly a 90% probability to rates remaining unchanged on October 28, more than 80% of investors are pricing in a 25-basis-point rate hike in December. Strong consumer spending and robust AI-related capital investment continue to support economic activity, but rising labor costs and higher energy prices leave the Fed with limited room for policy flexibility. This week will also serve as a key test for corporate profitability, with earnings reports due from hyperscalers including Microsoft, Alphabet, and Amazon, alongside major energy companies such as ExxonMobil and Chevron.

The Canadian dollar’s (CAD) appreciation toward 1.40 per US dollar highlights growing monetary policy divergence between the Bank of Canada and the Federal Reserve. While the Fed is expected to remain on hold, markets are pricing in approximately an 80% probability of a 25-basis-point rate increase, from 2.25% to 2.50%, at the Bank of Canada’s next meeting. Governor Tiff Macklem’s increasingly hawkish rhetoric, driven by Canada’s inflation acceleration to 3.1% in September due to the oil price shock, is being reinforced by resilient domestic demand.

Meanwhile, the Mexican peso (USD/MXN around 18.64) remains one of the most compelling carry-trade stories of the season. Mexico’s annual inflation rate accelerated to 3.62% in mid-October, effectively limiting the central bank’s ability to ease policy. Combined with the Fed’s expected pause, the resulting interest-rate differential continues to attract international capital flows into the peso.

In Europe, Friday’s session was broadly negative. Germany’s DAX (DE40) fell 0.75% (-1.41% for the week), France’s CAC 40 (FR40) declined 0.36% (-1.30% weekly), Spain’s IBEX 35 (ES35) gained 0.40% (-0.94% weekly), and the UK’s FTSE 100 (UK100) lost 0.32% (-1.76% for the week).

The key European events this week will be the European Central Bank meeting on Thursday and the presentation of the UK Autumn Budget on Wednesday by Chancellor John Healey. Economists broadly expect the ECB to maintain its current hawkish pause while assessing the impact of its dual tightening measures introduced in June and September as inflation accelerates to 3.8%. Nevertheless, markets continue to anticipate another 25-basis-point rate hike in December.

Upcoming European economic data are expected to reveal increasing divergence across the region. Eurozone GDP growth is expected to slow to 0.2% quarter-over-quarter (1.1% year-over-year), while Germany and Italy are expected to expand by just 0.1%. Spain is likely to remain the region’s growth leader with projected quarterly growth of 0.6%.

Brent crude’s surge above $116 per barrel reflects what many market participants view as the materialization of the commodity market’s worst-case scenario: geopolitical risks evolving into direct threats to Saudi Arabia’s energy infrastructure. The evacuation of US diplomatic personnel and Saudi Aramco’s transition to remote operations following Houthi attacks, combined with increasingly confrontational rhetoric from both Washington and Tehran, have significantly increased the market’s geopolitical risk premium. For both the Federal Reserve and the ECB, higher fuel prices strengthen the case for maintaining a hawkish policy bias and potentially delivering additional rate increases in December. Energy-importing economies in Europe and Asia remain particularly vulnerable, as rising energy costs continue to act as a drag on economic growth.

In contrast, US natural gas (XNG) prices have fallen to a five-month low near $2.65 per MMBtu, illustrating a growing divergence across commodity markets. While crude oil prices continue to surge, the US gas market is responding primarily to weakening domestic demand. Expectations for unusually warm weather across the Midwest and East Coast through early November are delaying the start of peak heating demand and weighing on near-term consumption expectations.

Asian markets delivered mixed results on Friday. Japan’s Nikkei 225 (JP225) declined 0.34% (-3.28% for the week), China’s FTSE China 50 rose 1.33% (-2.46% weekly), Hong Kong’s Hang Seng (HK50) gained 0.69% (-5.05% weekly), while Australia’s ASX 200 (AU200) edged higher by 0.02% (-0.35% for the week).

Across the Asia-Pacific region, investor attention is focused on the Fifth Plenum of the Communist Party of China Central Committee in Beijing. Together with upcoming industrial profit and PMI data, the meeting is expected to help shape the country’s long-term economic direction and policy priorities. In Japan, the Bank of Japan (BoJ) is widely expected to leave interest rates unchanged at 1.25%.

However, the return of inflationary pressures, with CPI running at 2.1%, largely driven by higher energy import costs, has strengthened market expectations for a rate hike to 1.50% in December. Monetary policy divergence remains a central theme across the region. The Reserve Bank of New Zealand (RBNZ) is expected to raise interest rates by 25 basis points to 3.0% in an effort to contain secondary inflationary effects. Meanwhile, Australia’s third-quarter CPI and September inflation figures, expected to show annual inflation of approximately 4.2%, are likely to be decisive for the Reserve Bank of Australia’s November policy meeting.

• S&P 500 (US500) 7,623.68 -39.75 (-0.52%)

• Dow Jones (US30) 52,215.16 -652.82 (-1.23%)

• DAX (DE40) 25,181.65 -190.10 (-0.75%)

• FTSE 100 (UK100) 10,690.36 -34.67 (-0.32%)

• USD Index 101.75 +0.15 (+0.14%)

News feed for: 2026.10.26

• German ifo Business Climate (m/m) at 11:00 (GMT+2) – EUR (LOW)