A rise in European bond yields and global trade and political developments

Short-term government bond yields in the euro zone rose slightly on Thursday, the day after the US Federal Reserve decided to raise interest rates and indicated further increases aimed at combating inflation.

The Federal Reserve raised the benchmark overnight lending rate by a quarter of a percentage point, to a range between 3.75 percent and 4 percent, in the first increase of its kind in 3 years, while the bank’s forecasts showed that the majority of policymakers expect at least one more increase before the end of the year, according to Reuters.

Given the size and importance of the US economy, as well as the Federal Reserve's influence on other central banks, US monetary policy usually affects global bond markets.

There was little change in the yield on German 10-year bonds, which are the reference bonds for the euro zone, to settle at 3.51 percent, slightly below its highest level in 17 years, amounting to 3.5723 percent, which it recorded on Tuesday.

The bond movement was more pronounced at the short-term end of the yield curve, the part most affected by monetary policy, as the two-year German bond yield rose by 1.5 basis points to 3.22 percent. It should be noted that bond yields move in the opposite direction to their prices.

As for the two-year US bond yield, it rose to its highest level in more than two years following the Federal Reserve’s decision, but it fell slightly on Thursday to 4.692 percent.

“It seems very likely that there will be another increase before the end of the year, perhaps in December,” said Marco Valle, head of macroeconomic analysis and chief economist at UniCredit Bank.

He added: “We expect monetary policy to remain unchanged next year, although risks tend toward further tightening if pressures resulting from energy prices do not ease.”

Energy prices remain the focus of attention

While the Federal Reserve's decision made headlines on Wednesday, investors in Europe were also watching oil and gas prices rise, raising the possibility that the European Central Bank would be forced to raise interest rates again.

Brent crude futures are still trading above $104 per barrel, despite their decline for the second consecutive session on Thursday.

“If oil prices remain above $100, we may see another increase in interest rates during December, and perhaps additional increases later,” said Mohit Kumar, chief European economist at Jefferies.

He added: “But if oil prices decline, the need for further increases will become questionable.”

Markets are pricing in a 40 percent chance that the European Central Bank will raise interest rates at its scheduled meeting in October, while they are fully taking into account the possibility of three increases, of a quarter of a percentage point each, by June next year.

India has warned Washington that new measures to impose tariffs on purchases of Russian oil could affect bilateral relations, India's foreign ministry said on Thursday, hours after the United States took a new step to penalize buyers of such shipments.

Earlier today, the US House of Representatives approved a comprehensive draft law on sanctions and customs duties aimed at increasing economic pressure on Russia due to its invasion of Ukraine, according to Reuters.

The bill, which has now been sent to President Donald Trump to sign into law, gives the president the power to impose heavy tariffs of up to 100 percent on China, India and other countries, to force them to reduce their dependence on Russian energy.

The Indian Ministry of Foreign Affairs said that it was informed of the passage of the draft law, adding that New Delhi had discussed this issue with various concerned American parties in recent months, and had “clearly made clear” the potential repercussions on bilateral relations and the global energy market.

The ministry affirmed, in a statement, that New Delhi remains “fully committed” to ensuring energy security for its people, and will continue to obtain supplies from various vendors according to market dynamics.

The ministry added, “The Indian side also made clear its intention to take all necessary measures to protect its commercial and economic interests,” noting that the government will work closely with commercial and industrial bodies to deal with the repercussions of this legislation.

India, the world's third-largest oil importer, is one of the largest buyers of Russian oil, as these purchases are seen as helping Moscow strengthen its budget since it launched its comprehensive invasion of Ukraine in 2022 and was subjected to widespread Western sanctions.

New Delhi has repeatedly sought to resist pressure to reduce its oil trade with Russia, stressing that its large population and large economy require safe, reliable and affordable energy supplies.

According to sources familiar with the matter, Indian refiners have arranged oil deals for the months of September and October that include shipments of Russian oil.

Two sources in the refining sector said that they want the government to raise this issue for discussion with the American authorities, given that oil prices may rise sharply if Trump decides to impose new customs duties.

The two sources added that oil supplies have decreased significantly due to the war in the Middle East, and that reducing Russian supplies will severely affect the profits of refining companies, which already sell fuel at prices below market prices.

The two sources added that refiners want the government to seek some facilities, instead of imposing 100 percent customs duties, allowing them to liquidate existing transactions and set a quota for India to buy Russian oil.

Complexity of trade talks

Indian analysts believe that the possibility of imposing new US tariffs on Indian exports may complicate the ongoing trade negotiations between India and the United States, and may delay or make it more difficult to reach a trade agreement.

“Washington may use the threat of tariffs to pressure India to reduce its purchases of Russian oil and accept a highly unequal trade deal,” said Ajay Srivastava, founder of the New Delhi-based think tank the Global Trade Research Initiative and a former trade official.

After months of talks, India and the United States have yet to reach a consensus on a trade deal, with New Delhi insisting on getting a better deal.

Indian Commerce Minister Piyush Goyal is scheduled to travel to the United States to attend the G20 trade ministers' meeting later this month, where he is expected to hold a bilateral meeting with US Trade Representative Jamieson Greer to discuss the next steps related to the deal.

South Korean Foreign Minister Cho Hyun said on Thursday that the announcement of Seoul's investment plans in the United States, within the framework of its trade agreement with Washington, has been postponed until some procedural issues are clarified, without going into further details.

Chu made these statements at the airport before leaving for the United States. He is scheduled to meet US Secretary of State Marco Rubio for talks on Friday.

This week, the South Korean government postponed a scheduled briefing to a parliamentary committee on its investment plans, and set a new tentative date for it on September 22, according to an informed official and media reports.

Lawmakers describe this parliamentary briefing as one of the final steps before Seoul and Washington set the final terms for a huge South Korean investment pledge in the United States.

The postponement of Thursday's briefing comes at a time when the two allies continue negotiations on the details of a trade agreement concluded last year, under which Seoul committed to investing $350 billion in the American manufacturing sector, in exchange for reducing customs duties on Korean imports to 15 percent.

Two officials in Seoul said that the dates for the parliamentary briefing and final announcement have not yet been decided, as negotiations continue.

South Korean news agency Newsy reported on Wednesday, citing a Korean parliamentary official, that the two allies are likely to hold a memorandum of understanding signing ceremony on September 23.

The implementation of the trade agreement witnessed delays, which prompted US President Donald Trump to threaten South Korea with higher tariffs earlier this year.

Of the total investments pledged by Seoul amounting to $350 billion, $150 billion has been allocated to the shipbuilding sector, while the two governments are working to finalize the terms of proposed projects for the remaining amount, amounting to $200 billion.

Several South Korean media outlets, including the Korea Economic Daily and Chosun Ilbo, reported this week that one of the proposals under discussion includes the possibility of South Korea acquiring a stake in the American company Westinghouse, which specializes in nuclear reactor technology.

According to reports, Seoul is seeking to acquire a minority stake in Westinghouse, with funding from its broader strategic investment fund in the United States, as part of a package that includes plans to build up to eight new nuclear reactors in the United States. Six of them are based on Westinghouse technology, and two are based on a South Korean model.

Other projects include plans to build a 6.3 gigawatt gas-fired power plant in the Encinal area of ​​Texas, at an estimated cost of $22 billion, to meet the growing demand for energy needed for artificial intelligence data centers, according to media reports.

Reports also indicated that Seoul is considering participating in a liquefied natural gas project in Alaska.