Surging oil prices rattled global bond markets on Friday, driving government yields to multi-year highs and triggering sharp losses in share markets as investors scrambled to price in more policy tightening from central banks around the world.
Brent crude climbed to a four-month high of $109.97 a barrel after a 6% overnight jump, capping a weekly gain of nearly 13%. The surge followed continued restrictions on oil flows through the Strait of Hormuz, where the United States and Iran have traded attacks, while Iran-aligned Houthis seized control of Yemen’s port of Mocha, threatening Saudi oil exports in the Red Sea.
Helima Croft, head of global commodity strategy at RBC Capital Markets, warned that maritime traffic through the Bab el-Mandeb is “gravely imperiled by the Houthi advances.” She tipped Brent could reach $121.99 a barrel later this year if a full-blown Saudi-Houthi war resumes.
That prospect served as a wake-up call for markets that are finally beginning to price in the risk of a protracted conflict. Comments from President Donald Trump that the war could last beyond the November midterm elections have added to the unease, with bond yields surging globally on heightened inflation fears.
The benchmark 10-year Treasury yield climbed 2 basis points on Friday to 4.9708%, its highest in three years and just shy of the closely watched 5% level, raising financial costs for the $40 trillion U.S. government debt. The 30-year yield scaled another 19-year top of 5.3803%, lifting U.S. mortgage rates and weighing on the housing market. Two-year yields rose another 2 basis points to 4.5835% after surging 12 basis points overnight as markets ramped up bets that the Federal Reserve will have to raise interest rates this month to tame inflation, currently priced at about 70% probability.
The rout in the U.S. bond market was partly attributed to a Treasury buyback programme that fell short of the expected $6 billion value. Asian bonds extended the global selloff, with Australia’s three-year government bond yields surging 18 basis points to a 15-year high of 5.047%. Japan’s 10-year government bond yields rose 6 basis points to 2.97% as data showed the country’s wholesale inflation stayed elevated, bolstering the case for an imminent rate hike from the Bank of Japan.
Analysts at JPMorgan now expect eight of the nine developed-market central banks to hike interest rates by year-end, including the Fed, the Bank of Japan, all four central banks in Europe, and the reserve banks of Australia and New Zealand.
“The tightening is for now expected to remain shallow, but risks to our forecasts lean in the direction of more action in the face of resilient growth, sticky core inflation, and commodity price pressures,” they said in a note.
The European Central Bank raised interest rates overnight for a second time this year, and some officials see more tightening ahead with October in play. The surge in oil prices has raised the stakes for U.S. consumer prices data for August due later in the day, which could make or break the case for a Fed rate hike next week. Forecasts are centred on a 0.2% monthly rise in the core measure of CPI, although risks are skewed towards a higher number as the PPI data overnight showed some stickiness.
Higher bond yields raised the discount rates used for corporate valuations, leaving Asian stocks in deep losses. MSCI’s broadest index of Asia-Pacific shares outside Japan lost 1.8%, while Japan’s Nikkei tumbled 2.8%. Chinese blue-chips fell 1.2% and Hong Kong’s Hang Seng dropped 1.5%. Nasdaq futures fell 0.2% and S&P 500 futures were little changed.
The U.S. dollar lifted with higher Treasury yields, having gained 0.4% overnight against its major peers. It was last steady on Friday at 99.04. In commodity markets, gold rose 0.3% to $4,328 an ounce after dropping nearly 2% overnight, failing to catch some of the safe-haven bids.
Source: ARY News