(Sept 2): A surge in oil prices rippled through global markets, hitting stocks and bonds on worries that higher energy costs will fuel inflation and force the Federal Reserve (Fed) to boost rates.
West Texas Intermediate crude topped US$90 as fighting between the US and Iran escalated, raising concern about further disruptions in Strait of Hormuz flows. Those risks lifted global yields to the highest since 2008, reducing the appetite for equities at the start of a seasonally weak month. The S&P 500 lost 0.7%, also dragged down by a rout in chipmakers.
President Donald Trump said the US strikes were in retaliation for Iran trying to put mines in the strait and for an earlier attack on a military base in Jordan. He warned of more strikes to come if Tehran responded.
The exchanges followed weeks of relative calm, during which the Trump administration said it was pivoting from military action to applying economic measures to pressure Tehran. Both sides have shown little inclination to resume talks since the collapse of an interim peace deal.
“Higher oil prices are threatening to reignite inflation, raising the risks of tighter monetary policy,” said Fawad Razaqzada at Forex.com. “Also unnerving investors is the continued rise in global bond yields – which kind of goes hand in hand with oil prices.”
Investors are demanding greater compensation to hold bonds as concerns about inflation, government spending and corporate borrowing to finance the artificial-intelligence buildout intensify. Against this backdrop, money markets see a Fed hike as more likely than not in September.
“The stock market has been able to ignore these moves so far this year,” said Matt Maley at Miller Tabak. “However, as we have seen in the past, higher yields don’t matter for stocks until they do.”
Expectations for a rate hike increased last week after Fed chair Kevin Warsh warned inflation wasn’t slowing meaningfully, saying officials would need to act if price pressures don’t ease soon.
“Warsh will be attentive to the impact that higher oil has on inflation compensation across all horizons and on bond yields,” said Krishna Guha at Evercore. “A single Fed hike would have a trivial effect on longer-term yields and even two or three may not have much impact.”
But pressure on yields will push Warsh to require a more clear-cut signal from the data that it is reasonable to pass on a September hike, he added.
Uploaded by Isabelle Francis