By Mike Dolan
Sept 21 (Reuters) — Following a volatile week of global central bank tightening, financial markets are shifting their focus to high-level diplomacy as world leaders convene for the United Nations General Assembly in New York this week.
At the top of the diplomatic agenda is Thursday’s highly anticipated bilateral meeting between U.S. President Donald Trump and Chinese President Xi Jinping in Washington.
Leading up to the summit, U.S. Treasury Secretary Scott Bessent and Chinese Vice Premier He Lifeng met over the weekend to lay the groundwork, focusing on trade relations, artificial intelligence concerns, and broader geopolitical issues.
However, the diplomatic push is overshadowed by ongoing conflicts, as simultaneous attacks in the Middle East and Eastern Europe dominated weekend headlines. Riyadh, the capital of Saudi Arabia, and Moscow, the capital of Russia, both sustained strikes—from Iran-backed Houthis and Ukrainian forces, respectively—highlighting the volatile geopolitical backdrop.
Despite the geopolitical tensions, oil prices eased on Monday on hopes that Saudi Arabia would restore pipeline flows across its East-West conduit and reports of increased fuel shipments in September. Optimism also lingered regarding potential Chinese diplomatic pressure on Iran to curb regional proxy attacks, though underlying economic data remained mixed.
Although Brent crude remained elevated above the $100-per-barrel mark and reports of localized refined fuel shortages emerged at U.S. retail outlets, global equity markets welcomed the pullback in crude prices, posting modest gains during light trading on Monday.
In Japan, domestic financial markets have had limited opportunity to process the Bank of Japan’s interest rate hike announced on Friday, as Tokyo exchanges remain closed for holidays for the majority of the week.
The Japanese yen trimmed some of its losses on Friday following reports of a rate check, after initially weakening against the dollar post-hike. As of Monday, the currency held steady, with markets cautious about potential official intervention actions while local exchanges remained shut.
Broadly, fixed-income markets continue to recalibrate the Federal Reserve’s policy trajectory following last week’s rate increase. Current pricing fully discounts another rate hike by year-end, with the odds of an additional move as early as next month split roughly fifty-fifty.
Minneapolis Federal Reserve President Neal Kashkari noted over the weekend that inflationary pressures extend beyond volatile energy costs, highlighting that services price inflation remains equally concerning. Economists suggest the Fed is attempting to adjust policy rates to accommodate a faster-growing economy, which could otherwise hinder its progress toward the inflation target.
Reflecting this policy shift, yields on two-year U.S. Treasury notes have surged by as much as 36 basis points over the past two weeks.
Elsewhere, the Bank of England is expected to implement further tightening before year-end, despite holding rates steady last week. In Europe, investors will monitor the aftermath of two recent state elections in Germany, which delivered poor results for the ruling CDU party. Despite the political pressure, German Chancellor Friedrich Merz has pledged to proceed with his agenda, and the euro maintained a steady opening on Monday.
In today’s chart of the day, investors are demanding a 104-basis-point premium to hold French ten-year government bonds over German bunds for the first time since 2012. This shift reflects growing anxiety over long-term fiscal sustainability across developed economies, particularly as France faces difficulty reining in its budget deficit ahead of next year’s presidential election. The government is targeting a reduction in the deficit from 5.4% of GDP this year to 5% next year via 54 billion euros in spending cuts. However, opposition parties are poised to challenge these measures, raising the risk of political instability.
Looking ahead to today’s key events:
- Chicago Federal Reserve President Austan Goolsbee is scheduled to speak.
- European Central Bank President Christine Lagarde and Bank of Canada Governor Tiff Macklem will also deliver remarks.
- Japanese financial markets remain closed for holidays, with trading set to resume on Thursday.