Bonds and stocks experienced a downturn as geopolitical tensions in the Middle East escalated after President Donald Trump rejected Iran's latest offer to reopen the Strait of Hormuz. This development dampened market optimism that had emerged late last week. Shorter-maturity Treasuries led the losses, with the two-year yield climbing five basis points to 4.90%, and the benchmark 10-year yield advanced four basis points to 5.20%. Japan's 10-year yield rose 2.5 basis points to 3.095%, and Australia's 10-year yield increased four basis points to 5.41%. These movements reflect growing expectations that the Federal Reserve may need to tighten monetary policy further, a sentiment reinforced by robust economic data.
Oil prices were a significant driver for markets, with Brent crude rising 2.1% to $106.49 a barrel and US crude futures adding 1.5% to $93.84 a barrel, bringing monthly gains to almost 18%. Elevated energy costs are contributing to inflationary pressures, bolstering expectations for additional interest rate increases. The average yield on a gauge of global bonds surpassed 4% for the first time since 2007, raising concerns that higher borrowing costs could negatively impact the economy and corporate earnings. Investors now see about a 70% probability of a Federal Reserve rate hike next month, up from approximately 65% on Friday.
Equity markets also felt the pressure. MSCI's index of Asian stocks slipped 0.5%, with benchmark equity gauges in mainland China and South Korea dropping more than 2%. Nasdaq 100 futures fell 1%, and S&P 500 futures slipped 0.5%. However, Europe's Stoxx 600 bucked the trend, rising 0.1% as consumer stocks rallied. Laurent Lamagnere, at AlphaValue, noted the challenging environment for equities, citing rising oil prices and surging bond yields. Gold prices, which typically have an inverse correlation to oil and interest rates, extended their losses for September, having declined by more than 6%.
