MARKET WRAPS
STOCKS: Stocks fell for the third straight session as the U.S. and Iran escalated strikes near the Strait of Hormuz.
TREASURYS: Treasury yields rose and yields on both the two-year and 10-year notes closed at their highest level since January 2025 amid inflation concerns.
FOREX: The U.S. dollar rose against rivals as traders recalibrated rate expectations in light of rising oil prices.
COMMODITIES: Oil futures rose 5.2% to top $90 a barrel in New York after the U.S. responded to attacks on tankers in the Strait of Hormuz with another round of strikes on Iran.
HEADLINES
Bond Yields Around the World Soar in Challenge to Government Borrowing
The global economy has a new challenge to surmount: an unruly bond
market that is sending borrowing costs to their highest levels in
decades.
A rout in bond markets deepened Tuesday when Japan's 10-year bond
yield touched 3% for the first time since 1996. Markets in other heavily
indebted nations had their own superlatives. The U.K's 30-year bond yield
hit the highest level since 1998. Bond yields in Germany and France rose
to their highest levels in more than a decade. The 10-year U.S. Treasury
yield edged closer to 4.8%, a level last touched in January 2025.
The runup in interest rates has profound consequences for the global
economy, heaping pressure on everyone from home buyers to credit-card
holders and especially governments, which have borrowed heavily in recent
years.
U.S. Targets Iran in Fresh Wave of Strikes
The U.S. carried out new strikes on Iranian targets Tuesday, with
President Trump saying the operation was launched in retaliation for
Iran's attempts to lay mines in the Strait of Hormuz and attacks
targeting American servicemembers in the Middle East.
Fighting has picked back up this week as the U.S. and Iran battle over
control of the strategic waterway. On Sunday, Iran fired missiles at U.S.
bases after the U.S. struck Iranian launchers that it said were preparing
to fire rockets carrying sea mines into the strait.
In a post on social media, Trump threatened more powerful strikes if
Tehran responded.
A War That Won't End Is Complicating the Fed's Next Move
Rising oil prices are forcing central banks to decide how long they
can treat the Iran war's effect on inflation as temporary. For the
Federal Reserve, investors increasingly think the answer is not much
longer.
Treasury yields have climbed alongside crude prices in recent days,
with rates on the benchmark 10-year note reaching the highest levels of
President Trump's term. Rising energy costs tend to lift yields either
way: Investors expect either higher inflation or the Fed to raise rates
to prevent it.
Fed governor Michael Barr said Tuesday that the central bank should
begin raising rates this month unless new data show price pressures are
easing.
Dell Technologies Boosts Fiscal Year Outlook by $25 Billion as Server
Revenue Surges
Dell Technologies lifted its full fiscal year revenue outlook by $25
billion as demand for the company's servers propelled its revenue to a
record high in the second quarter.
The technology company on Tuesday said it now expects to bring in $192
billion in revenue in the current fiscal year, up from the midpoint of
its previous guidance, which was $167 billion plus or minus $2 billion,
and ahead of analyst expectations of $174.05 billion, according to
FactSet.
The outlook includes $74 billion of revenue from AI-optimized servers,
up from a previous view of $60 billion and representing threefold
year-over-year growth.
U.S. Factory Activity Growth Slowed in August
Factory activity expanded in the U.S. at a slightly slower pace in
August, according to a survey of manufacturing firms.
The ISM's purchasing managers index was 54.6 in August compared with
55.6 in July. Readings above 50 indicate a sectoral expansion. Analysts
polled by The Wall Street Journal were expecting a reading of 55.3.
The new orders index expanded for the eighth consecutive month after
four straight readings in contraction. Meanwhile, the prices index
remained in expansion, registering the same reading as July. The
employment index reading was down from July.
David Ellison Is Promising at Least 30 Movies a Year. Hollywood Is
Skeptical.
A cornerstone of Paramount Chief Executive David Ellison's argument
that his planned Warner Bros. Discovery acquisition will benefit
Hollywood is his promise to release at least 30 movies annually in
theaters postmerger.
Many in the movie business are skeptical.
Opponents of the deal, which a coalition of 12 states have sued to
block on antitrust grounds, and even some supporters note that Ellison's
plan would defy a decadeslong trend of shrinking studio film slates.
These Banks Are Banding Together to Launch a Stablecoin
Bank of America, Citigroup and Goldman Sachs are among a group of
nearly two dozen firms teaming up to jump into the world of stablecoins,
or digital tokens that can be used for cross-border transactions.
The Wall Street Journal reported last week that banks have shifted to
a more defensive strategy on stablecoins, with some executives worried
the tokens could rise in popularity and encroach on their businesses.
Their coming stablecoin effort is intended to focus on commercial
clients, the Journal reported, though use cases could vary by region and
include retail markets. It will be dollar-denominated before expanding to
other Group of Seven currencies.
On Tuesday, the consortium said it would move to launch the stablecoin
venture in the first half of 2027. The 21 firms plan to establish a
company to support the venture.
TALKING POINT Why You Should Give Long Bonds the Benefit of the Doubt
Buying long-term bonds may be the most unpopular trade right now on Wall Street, but you should consider it nevertheless.
That's not just because of contrarian analysis' first principles, which hold that "when everyone thinks alike, everyone is likely to be wrong" (to quote Humphrey Neill, widely considered the father of contrarian analysis). It's also because the rationales investors are giving for avoiding long-term bonds don't withstand scrutiny.
Consider what is perhaps the most commonly cited rationale: The inflationary impact of federal government debt, which earlier this month eclipsed the $40 trillion mark. The interest cost on that debt is now the largest single line item in the federal budget, fueling worries about an out-of-control debt spiral. Though these are very real concerns, it's not clear they have the bearish significance that bond traders are assuming.
After all, as Wes Crill, a vice president at Dimensional Fund Advisors, points out, debt level concerns have been around for a while. But, Crill argues, the size of the government's debt and its associated interest burden are already reflected in bond prices. The inflation threat that many bond investors face is from unexpected inflation-which, by definition, is unexpected.
Support for Crill's argument comes from inflation swaps, which are fixed income derivatives whose interest rates are pegged to future inflation. Inflation swap rates have not only not risen significantly in recent months, they are even slightly lower today than they were several months ago, when the $40 trillion federal debt mark hadn't yet been eclipsed. The same story is being told by another measure of expected inflation-the so-called break-even inflation rate, which is the difference between yields on nominal Treasuries and yields on the Treasury's Inflation-Protected Securities, or TIPS.
Another argument some are advancing to justify lower prices for bonds is that they are far more volatile than in years past. This argument would have validity if bonds' expected volatility had in fact increased, since bond investors require higher yields to compensate them for increased volatility. But expected volatility has fallen, not risen.
--Mark Hulbert, Barron's
Expected Major Events for Wednesday 08:00/ITA: Jul PPI
11:00/US: 08/28 MBA Weekly Mortgage Applications Survey
12:15/US: Aug ADP National Employment Report
13:45/CAN: Bank of Canada interest rate announcement
14:00/US: Jul Metropolitan Area Employment and Unemployment
14:00/US: Jul Manufacturers' Shipments, Inventories & Orders (M3)
14:30/US: 08/28 EIA Weekly Petroleum Status Report
18:00/US: U.S. Federal Reserve Beige Book
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