Global stock markets experienced declines as oil prices surged due to the ongoing stalemate between the US and Iran over the Strait of Hormuz. Brent crude climbed to about $107-$108 a barrel, raising concerns about inflation and the likelihood of additional interest rate increases by the Federal Reserve. This led to a sell-off in both stocks and bonds, with the S&P 500 falling by 0.9% to 7,673.11 and the Nasdaq 100 dropping by 1.5%.
The increase in oil prices contributed to a significant rise in global bond yields. The 10-year Treasury yield advanced to 5.26%, its highest level since mid-June 2007, while 30-year Treasury yields reached their highest since mid-May 2004, at 5.576%. Other government bonds also saw yields climb, with Japan's 10-year yield increasing by 2.5 basis points to 3.095% and Australia's 10-year yield rising by four basis points to 5.41%. This trend highlights investor concerns that higher borrowing costs could eventually impact the economy and corporate profits.
Federal Reserve officials cited strong economic growth and a robust labor market as factors that might necessitate further monetary tightening. Markets are now pricing in about a 70% probability of another Fed rate hike next month. The rising yields also dampened the appeal of gold, which saw its losses for September exceed 6%. Despite these headwinds, some companies, like Nvidia, demonstrated confidence with a record $150 billion share buyback authorization, although shares of software companies generally declined following Meta Platforms' new enterprise AI platform announcement.
Analysts noted that the market narrative is currently dominated by the prospect of "higher yields for longer," putting pressure on equities. While U.S. growth and corporate earnings have remained strong enough to absorb higher yields and oil prices so far, the ongoing geopolitical risks and inflationary pressures make it challenging for investors to maintain optimism. The focus remains on oil prices and upcoming economic data, particularly labor market figures, for potential clues on the Fed's next moves.
