Market Overview
Global markets experienced a downturn as surging bond yields across the US and Japan fueled inflation concerns and amplified expectations for further central bank rate hikes. This sentiment permeated Asian trading, with most indices closing lower, and is setting a cautious tone for Europe’s open. Geopolitical tensions, including extended US-China trade talks and persistent US-Iran tensions impacting oil supply, further contributed to a complex backdrop for investors.
Australia’s S&P/ASX 200 ended the day down 0.72%, while Hong Kong’s Hang Seng traded down 0.31%, and mainland China’s Shanghai Composite was lower by 0.94%. Japan’s Nikkei 225, however, gained 0.97% in catch-up trade following a holiday, though its rally was tempered by rising bond yields. US equity futures were flat to lower, after the S&P 500 slipped 0.76% and the Nasdaq Composite lost 0.69% overnight. European equity markets are tracking a lower open, with Euro Stoxx 50 and Stoxx 600 futures down 0.6% and 0.5% respectively.
What Drove Markets
Global Bond Rout and Rate Hike Expectations
A dominant force in markets was the surging US Treasury yields, with the benchmark 10-year Treasury yield trading at 5.114%, up 15.10 bp, hitting its highest level since July 2007. The 2-year Treasury note yield stood at 4.947%, marking its highest level since May 2024, and the 30-year Treasury traded at 5.401%, up 10.50 bp, moving above 5.4%. This sell-off was mirrored in Japan, where the 10-year government bond yield stood at 3.062%, rising 8 basis points to a 30-year high, which was also described as its highest level since August 1996.
Stronger-than-expected S&P Global’s manufacturing and services purchasing managers’ index (PMI) data reinforced the view that U.S. businesses are continuing to boom. Vail Hartman, a U.S. rates strategist at BMO, noted that this implied ample latitude for both policy rates and Treasury yields to push higher in the near-term, intensifying expectations for an October Federal Reserve rate hike, which now suggests a greater than 68% likelihood.
Oil Prices and Geopolitical Tensions
Oil prices experienced volatility, initially surging back above $US100 a barrel due to supply anxieties stemming from a stalemate between Iran and the US regarding the Strait of Hormuz. Speculation of a potential 90-day US ban on diesel exports, as reported by Politico, also contributed to market unease. Brent Crude traded at 98.53, down 4.41%, while WTI Crude traded at 92.54, up 0.41%. Despite later edging lower as traders assessed reports of higher crude imports by Asia and hopes for diplomacy, the general upward pressure on oil continues to fuel inflation concerns. BMO Capital Markets noted that “severe supply chain bottlenecks,” as well as higher fuel and transport prices, can drive inflation.
Australia’s Economic Outlook
The Australian sharemarket closed lower following data showing the national unemployment rate rose to 4.6% in August, its highest in five years, despite the economy adding 39,500 jobs. An analyst described this as the “final nail in the coffin” for a Reserve Bank of Australia (RBA) rate rise. However, market expectations for a rate hike ahead of the RBA’s September 29 policy decision “remain firm.” The Australian Dollar traded at 0.7038, down 1.04%.
US-China Trade Truce
Ahead of President Xi Jinping’s state visit to Washington, the US and China agreed to extend their trade truce by two months to January 10, aimed at keeping tariffs lower and rare earths flowing. U.S. Treasury Secretary Scott Bessent stated Beijing needs to fulfill more deliverables. Discussions during the summit are expected to cover trade, artificial intelligence, technology, and Taiwan.
Stocks to Watch
- S&P/ASX 200 (^AXJO) closed at 8,702.0, down 0.72%, with the Australian sharemarket finishing lower following rising unemployment and tracking New York losses. Energy stocks like Woodside Energy (WDS.AX), which closed at 31.61, up 1.54%, gained from surging oil prices, but the broader materials sector, including BHP (BHP.AX) down 1.69% to 61.02, Rio Tinto (RIO.AX) down 0.69% to 166.46, and Fortescue (FMG.AX) down 0.59% to 16.75, slid.
- Nikkei 225 (^N225) closed at 65,647.27, up 0.97%, rising in catch-up trade after a three-day holiday, though tempered by a sharp rise in domestic and US bond yields. SoftBank (9984.T) closed at 6,369.0, up 0.86%, after announcing an $11.1 billion bond issuance (comprising $10 billion in dollar-denominated senior notes and 1 billion euros) to fund a $10 billion payment for the third and final tranche of its $30 billion follow-on investment in OpenAI, expected to close Oct. 1. The Dollar Yen (JPY=X) traded at 158.4540, up 0.63%, with the yen’s weakness exacerbating inflationary pressures in Japan.
- Hang Seng (^HSI) traded at 24,756.02, down 0.31%, with tech stocks and chipmakers leading losses amid broader Asian declines driven by surging global bond yields.
- Shanghai Composite (000001.SS) traded at 3,899.39, down 0.94%, as China stocks fell, pressured by global bond yields and investor focus on the US-China summit. The CSI 300 was down 1.60%.
- The S&P 500 (^GSPC) slipped 0.76% to 7,706.03, and the Nasdaq Composite (^IXIC) lost 0.69% to 26,936.04 overnight, retreating from recent highs as the yield on US 10-year bonds leapt.