Bab el-Mandeb conflict drives oil price spikes and interest rate hikes

Conflict in the Bab el-Mandeb Strait has intensified, with Houthi forces seizing the Yemeni port of Mokha and Perim Island. The group also launched missile and drone attacks against Aden International Airport and targeted infrastructure in Saudi Arabia, including the King Khalid International Airport in Riyadh. In response, a Saudi-led coalition has launched counter-offensives to reclaim strategic territory near the strait.

These geopolitical tensions have significantly impacted global financial markets. Oil prices saw volatility, with Brent crude reaching approximately USD 110/bbl following the disruption of maritime routes and drone attacks on Saudi Arabian pipelines. The energy shock contributed to inflationary pressures, prompting major central banks to raise interest rates. The US Federal Reserve increased its target range by 25 basis points to 3.75%-4.00%, while the ECB and Bank of Japan also implemented rate hikes.

In the US, business activity grew at its fastest pace since July 2021, leading to a rise in the 30-year Treasury yield above 5.61%. While the Nasdaq Composite gained 1.9% due to technology sector strength, the Dow Jones Industrial Average fell 4.3%, ending a five-month winning streak.