US stocks and Treasuries experienced a downturn as inflation risks took center stage, with Brent crude surpassing $100 per barrel. This pushed traders to increase their bets on global interest rate hikes. S&P 500 contracts declined by 0.4%, while Nasdaq 100 futures were down 0.6%, reversing earlier gains that echoed a rally in Asian technology shares. In Europe, the Stoxx 600 dropped 1.5%, with economically sensitive sectors leading the decline.
Treasuries fell across the curve, with shorter-term bonds being hit hardest. The two-year yield climbed three basis points to 4.42%, reaching its highest level since 2024. Europe saw an even steeper selloff. Investors are anticipating an announcement regarding the size of Thursday's buyback operation for outstanding 10-year and 20-year Treasuries, part of Treasury Secretary Scott Bessent’s strategy to manage yields. The 10-year Treasury yield advanced two basis points to 4.81%.
The surge in Brent crude above $100 a barrel, a threshold last crossed in July, comes just days before the latest US inflation print. This data is considered crucial in determining whether the Federal Reserve will raise rates next week, with money markets currently pricing in approximately a 65% chance of a move. Traders are also factoring in four rate hikes from both the Bank of England and the European Central Bank by the end of 2027.
Analysts noted that the risks to equity markets are increasing due to rising discount rates. Ashley Lester, chief research officer at MSCI, questioned how much continued AI earnings growth can propel equity markets forward. Joachim Klement at Panmure Liberum highlighted that oil prices at $100 per barrel bring inflation pressures back into focus, making the ECB’s decision and Christine Lagarde’s comments on Thursday particularly important in the absence of forward guidance from the Fed.
Worries about persistent price pressures, government borrowing, and a wave of corporate issuance have driven global yields to multi-year highs. The Treasury will offer $39 billion in 10-year notes, following a $58 billion sale of three-year debt at the highest yield for that tenor since 2024. RBC Capital Markets strategists, led by Lori Calvasina, cautioned that a 10% pullback in US stocks is increasingly likely, especially as midterm elections approach and the market enters a seasonally challenging period. The S&P 500 has historically fallen in September in five of the last ten years, and concerns such as potential backlash against the artificial-intelligence trade as a campaign issue and the ongoing Iran war could add volatility.
