The resurgence of conflict between Israel and Palestine raises concerns about energy inflation, with Europe leading the decline in global bonds

According to Zhitong Finance APP, due to the escalating conflicts in the Middle East, concerns about oil supply disruptions have arisen, which may exacerbate inflation, leading European bonds to lead the global market decline. German government bond yields have risen across the board, with the yield on the 10-year German government bond increasing by as much as 5 basis points to 2.56%, reaching a new high for the week. U.S. Treasury yields have also generally increased, with the yield on the 10-year U.S. Treasury bond rising by 3 basis points to 4.40%.

Traders are closely monitoring Iran's response to the U.S. attack on Iranian nuclear facilities. This attack has plunged the Middle East into an unprecedented crisis. Iran may retaliate by disrupting shipping in the Strait of Hormuz, a vital passage through which one-fifth of the world's crude oil is exported.

Jordan Rochester, head of macro strategy for Europe, the Middle East, and Africa at Mizuho International, stated, "This morning, we are all engaged in oil-related trading." He added that rising energy prices could lead to "more severe inflation issues for central banks this summer," which may limit the extent of interest rate cuts.

Unlike the United States, which is a net energy exporter, Europe is more vulnerable to oil price fluctuations due to its reliance on imports. Traders have reduced their bets on interest rate cuts by the European Central Bank, expecting a rate cut of about 20 basis points by the end of the year. Meanwhile, the 10-year German breakeven inflation rate has risen by as much as 4 basis points.

However, data released at the same time showed that the private sector economy in the region saw almost no growth in June. Data released on Monday indicated that the Eurozone's June SPGI Composite PMI preliminary value remained at 50.2, slightly above the 50 mark that separates expansion from contraction. Economists had previously expected the index to accelerate to 50.5. The services PMI returned to the critical 50, while the manufacturing PMI remained at 49.4, showing no growth for 36 consecutive months.

Jim Reid's team of macro strategists at Deutsche Bank stated that for the U.S., "any negative impact will manifest through deteriorating financial conditions or rising long-term rates, as the Federal Reserve has another reason to delay rate cuts." They noted that in Europe, "the impact could be more severe," pointing out that a $10 increase in oil prices could raise the core inflation indicator HICP in Europe by 0.25% within a month.

The U.S. dollar has appreciated against all G10 member currencies, with the Bloomberg Dollar Spot Index rising by as much as 0.4%. Richard McGuire, head of interest rate strategy at Rabobank, stated, "The escalation of the Middle East conflict is concerning." He also noted that U.S. Treasuries may "perform well, as even though the Trump administration has clearly threatened the U.S.'s special status, U.S. Treasuries are still viewed as a global risk-free asset."