Market Overview
Global bond yields surged to multi-decade highs, reflecting persistent inflation concerns amplified by escalating oil prices and geopolitical tensions in the Middle East. This backdrop intensified expectations of imminent interest rate hikes from major central banks, including the US Federal Reserve, the Reserve Bank of Australia, and the Bank of Japan. Consequently, equity markets faced pressure, with the Australian benchmark index closing at a three-month low. However, some Asian technology stocks experienced a rebound following reassessments of artificial intelligence (AI) development concerns.
Markets
Australian shares, as measured by the S&P/ASX 200 (^AXJO), closed at a three-month low, falling 0.88% to 8,672.50. In the US, the 10-Year Treasury yield (^TNX) stood at 4.96%, reflecting a daily move of -1.40 bp, after touching a 20-year top of 5.02% during the session. Oil prices continued their ascent, with Brent Crude (BZ=F) trading at $107.58 a barrel, up 1.80%, amidst ongoing Middle East hostilities. West Texas Intermediate (WTI) Crude (CL=F) traded at $103.34, up 1.92%. Across Asia, Japan’s Nikkei 225 (^N225) closed up 0.20% at 63,618.09, while South Korea’s KOSPI (^KS11) finished down 1.02% at 6,616.46. Hong Kong’s Hang Seng Index (^HSI) traded down 0.82% at 24,712.48. Mainland China’s Shanghai Composite (000001.SS) closed 0.47% lower at 3,867.01.
What Drove Markets
A relentless surge in global government bond yields dominated market sentiment, pushing them to multi-decade highs amid mounting inflation fears. Australia’s 10-year bond yield scaled a new 15-year high of 5.41%, while the US 10-year yield hit a 20-year top of 5.02% during the session. Japan’s 10-year government bond yield climbed above 3%, reaching its highest level since September 1996. Barclays strategists highlighted that the approaching 5% threshold in 10-year yields marks a historically important inflection point, typically becoming a persistent headwind for equities.
Oil prices further fueled inflation risks, extending gains as Brent futures climbed past $US107 a barrel. The continued hostilities in the Middle East, including a drone attack that temporarily shut down a key East-West Pipeline in Saudi Arabia and threatened up to 4% of global oil supply, sustained upward pressure on energy markets.
This inflationary environment intensified expectations for hawkish central bank action. Financial markets are pricing an 84% chance of a Reserve Bank of Australia (RBA) rate increase to 4.6% this month, with a November increase fully factored in. For the US Federal Reserve, traders believe there is a roughly 92-93% likelihood of a quarter-point rate hike at its policy meeting concluding on Wednesday (Thursday AEST). The Bank of Japan is also widely expected to raise its policy rate to 1.25% on Friday, which would be its highest level since April 1995.
Equity markets showed a mixed performance. Australian shares were notable laggards, with the S&P/ASX 200 falling to a three-month low as rising bond yields and rate hike expectations dented risk appetite. In contrast, some Asian markets, particularly in AI-related technology stocks, displayed resilience. This followed a reassessment of earlier concerns about the pace of AI development, with US President Donald Trump playing down misuse concerns. OCBC views the long-term AI-driven bull market as intact, with Munro Partners chief investment officer Nick Griffin stating, “AI is the next big platform shift, and it’s only just beginning so we believe this is a very good time to be in investing,” adding that “this is a boom, not a bubble.”
Adding to the global economic picture, recent August data from China revealed an uneven recovery. Retail sales growth slowed to 0.4% year-on-year, missing forecasts, and urban fixed-asset investment shrank 7.2%, deepening from prior months. While industrial output expanded by 5.2%, China’s National Bureau of Statistics (NBS) warned of an “acute” domestic imbalance between “strong supply and weak demand.”
Stocks to Watch
In Australia, index heavyweights BHP (BHP.AX) and Rio Tinto (RIO.AX) closed down 2.21% and 2.20% respectively, as materials lagged. Among the “big banks,” Commonwealth Bank (CBA.AX) fell 1.59% to 152.50. Energy stock Woodside (WDS.AX) also came under pressure, closing down 2.21% at 32.35, despite higher oil prices. Bucking the trend, healthcare stock CSL (CSL.AX) gained 1.57% to 174.26, extending recent gains. Macquarie (MQG.AX) closed down 2.45% at 239.03, though it received an upgrade from Citi on an energy boost.
In Asian tech, while earlier sentiment indicated a rebound in AI shares, South Korean semiconductor firms SK Hynix (000660.KS) closed down 0.47% at 1,689,000.00, and Samsung Electronics (005930.KS) closed down 0.70% at 247,250.00. Hong Kong technology share Tencent (0700) was up 2.23% in active trading.