Global equities slipped on Tuesday, with Brent crude climbing toward the $100-per-barrel mark, reinforcing expectations that central banks may need to raise interest rates further to curb inflation. The yen strengthened to its highest level since February. As of this writing, Dow futures fell 0.81%, S&P 500 futures declined 0.25%, while Nasdaq futures rose 0.07%. European and Asian markets also traded lower, with the pan-European STOXX 600 index dropping 0.4%.
In Tuesday's pre-market trading, semiconductor stocks showed relative strength. Willem Sells of HSBC noted that U.S. equity valuations still do not fully reflect the productivity gains and earnings growth potential driven by artificial intelligence. He highlighted that investors remain skeptical about AI chipmakers' earnings growth forecasts through 2027, keeping valuations at a discount. Mark Preskett, senior portfolio manager at Morningstar Wealth, added: "If you take a step back, the earnings from some of the large AI names have actually been quite strong. But aside from Nvidia, the overall market reaction has been fairly muted."
Middle East Tensions Re-ignite
Earlier, Iran-backed Houthi rebels in Yemen attacked energy facilities and cities within Saudi Arabia, underscoring the risk of the Middle East conflict spreading further regionally and complicating global fuel supply prospects. International benchmark Brent crude broke past the $98-per-barrel threshold. Simultaneously, robust crude purchasing by China further tightened market supply. Diesel prices have surged to record highs, nearly doubling compared to pre-conflict levels, while gasoline prices have also climbed significantly. Even spot crude prices for immediate delivery are trading notably above futures, clearly reflecting the conflict's impact on global energy markets. Over the past few weeks, resurgent inflation has weighed on stock markets, partly due to global bond yields hitting multi-year highs, pressuring central banks to consider further rate hikes.
CPI in Focus
Early this week, concerns over potential Middle East volatility are dominating market sentiment, while investors await U.S. inflation data due Friday. This data could be crucial in determining whether the Federal Reserve raises rates or holds them steady this month. Current money market pricing suggests traders estimate about a 58% probability of a Fed rate hike. Meanwhile, markets have largely priced in rate hikes from the European Central Bank and the Bank of Japan for September. The ECB is almost certain to raise rates by 25 basis points on Thursday, and expectations for a similar move by the BOJ next week continue to grow, driving the yen toward its strongest rally in two years. Anastasia Amoroso of Partners Group commented: "We might be entering a digestion period because global central bank policy is undergoing a fairly significant shift. So, markets could give back some gains, or at least enter a consolidation phase."
Copper prices are adding to commodity-driven inflation pressures, marking a second consecutive day of record highs, supported by constrained supply and anticipated U.S. tariffs on refined metal imports.
Extreme Bond Positioning
Tuesday's 3-year Treasury auction kicks off a busy week of debt issuance, followed by 10-year and 30-year sales, with long-term yields hovering near multi-year highs. The U.K. is also expected to pay its highest borrowing costs in at least 1998 at its upcoming bond sale. U.S. Treasury prices slipped ahead of the $58 billion 3-year auction. The benchmark 10-year Treasury yield stood at 4.804%, up 2 basis points on the day, close to its highest level since November 2023. Mohit Kumar of Jefferies International noted that current bond market positioning is extreme, which could lead to a quick pullback in yields. Potential triggers include Friday's inflation data or next week's Fed decision. Kumar stated: "If CPI comes in benign, which is our base case, we could see a bout of position squaring that helps rates rally. Any drop in yields could support risk assets."
The dollar held roughly steady. The yen rose as much as 1% against the dollar, breaking through the 154 level, supported by expectations of tighter BOJ policy and technical momentum.
Yen Shockwaves Felt Globally
Tuesday's market focus was on oil, but the yen's significant rally may have more far-reaching global implications. With the yen historically a low-yielding currency, traders have long borrowed it to buy higher-yielding currencies, bonds, and equities—a strategy known as the carry trade. However, as the BOJ prepares for further rate hikes and Japanese government bond yields sit at or near historic highs, capital is starting to flow back to Japan, prompting a gradual unwinding of these carry positions. In 2024, when the yen last appreciated at a similar pace and carry trades reversed sharply, global market volatility spiked and significantly impacted equities. Over the past week alone, the yen has appreciated nearly 4%, marking its largest weekly gain since July 2024. On Tuesday, the dollar-yen pair traded around 153.93. Francesco Pesole, strategist at ING, remarked: "While short-term fundamentals suggest this rally may be somewhat stretched, betting against the trend remains risky, especially while there is still room for further carry trade unwinding." Analysts at Capital Economics noted in a research report: "With wage growth continuing to strengthen, the case for the Bank of Japan to accelerate its policy tightening pace is becoming increasingly compelling."
Multiple Saudi energy facilities were attacked and caught fire. According to a statement from Saudi Arabia's Energy Ministry, several energy and utility installations were hit by Yemen's Houthi rebels, causing fires at multiple sites and temporarily disrupting operations at some facilities. The ministry said it is working to ensure facility safety, personnel security, and operational continuity. Earlier, the Saudi-led coalition in Yemen stated that Houthi attacks targeted civilian and economic infrastructure in Abha, Khamis Mushait, Najran, and Jizan, injuring 73 people. The coalition vowed a firm response to the attacks.
The U.S. Treasury will announce its bond buyback size, with markets watching Treasury Secretary Bessent's level of commitment. Bessent's resolve to support the bond market faces a test on Wednesday at 11:00 a.m. Eastern Time when the Treasury reveals the maximum amount of 10- to 20-year notes it plans to repurchase. On September 10, the Treasury will also disclose the exact amount purchased under its buyback program launched in May 2024. Previously, the Treasury stated it would repurchase at least $4 billion of long-term debt per operation before November 4, up from $2 billion in earlier operations. However, the Treasury retains discretion to expand buybacks, and markets broadly expect Bessent's actions to ultimately exceed previously announced targets.
Copper's rally continues, with both London and New York markets hitting record prices today, driven by supply-demand imbalances and tariff concerns. Analysts attribute the surge to expectations of robust long-term demand from data center construction, grid upgrades, electric vehicles, and renewable energy projects, alongside declining output from major producing nations. Potential additional tariffs on refined copper imports are further fueling gains; while tariffs announced last summer did not cover refined copper, the U.S. Commerce Department proposed a 15% tariff on refined copper imports starting in 2027, rising to 30% in 2028.
Stock Movers
Roivant Sciences surged 24% after its subsidiary Pulmovant reported Phase 2 trial results for mosliciguat, showing clinically meaningful and statistically significant placebo-adjusted reductions in pulmonary vascular resistance in patients with pulmonary hypertension associated with interstitial lung disease. UBS upgraded Lockheed Martin from Neutral to Buy, sending shares up 0.7%, citing underpriced earnings upside potential at the defense giant. Novartis tumbled 12% after Phase 3 trial results showed its del-desiran drug failed to achieve "significant improvement" in patients with type 1 myotonic dystrophy. Morgan Stanley downgraded Peloton from Equal Weight to Underweight, causing shares to drop over 4%, stating that "PTON's fitness business faces structural headwinds." Boston Scientific fell over 2% after disclosing a cyberattack that could impact 2026 sales and profit targets. Bloom Energy rallied over 6% ahead of its inclusion in the S&P 500 index on September 21, benefiting significantly from the AI data center buildout; the stock has gained roughly 190% year-to-date.
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