(Aug 18): Stocks joined bonds lower on concern that elevated oil prices will fuel inflation amid dimming hopes for a deal to end the Iran war.

Those worries sent equities further away from their all-time highs, with declines in most S&P 500 companies overshadowing an advance in chipmakers. Brent crude settled near US$91 a barrel, spurring speculation that inflationary pressures could make the Federal Reserve (Fed) raise rates before the year is over. Treasury 30-year yields hit the highest level since 2007.

Prospects for peace in the Middle East suffered a fresh setback, with President Donald Trump saying he’s not interested in extending the expiring agreement with Iran and fighting flaring anew in Lebanon. 

Asked whether he would seek an extension of the memorandum of understanding signed in June — which technically expires Monday — Trump told reporters, “No.” That truce was meant to give Washington and Tehran a window to reach a more lasting peace deal within 60 days.

Given the rise in oil prices and the lack of progress on the US-Iran diplomatic front, the Middle East remains a risk factor, according to Chris Larkin at E*Trade from Morgan Stanley.

Also contributing to investor anxiety was the rise in long-term yields. That reflects investor angst over surging government spending, a flood of long-dated bond sales, and inflation that’s been stuck over the Fed’s target for the past five years. 

“Investors are increasingly focused and concerned about the growing amount of US debt and America’s lack of fiscal discipline,” said Anthony Saglimbene at Ameriprise. “And frequent, large-scale treasury auctions are a chance for the bond market to push back against the government’s eroding fiscal trajectory, as they demand higher yields for the auctions to clear.”

The calculus regarding longer-term Treasury holdings increasingly requires that an investor be comfortable financing ever-larger government borrowing needs at current yields, he added.

“And should investors require more compensation in the future as more Treasury auctions come to market, it will be increasingly important for corporate fundamentals and AI momentum to continue meeting expectations if the equity market is to keep looking past a higher-for-longer rate environment,” Saglimbene concluded.

Uploaded by Isabelle Francis