Market Overview
Global markets faced a potent “triple whammy” on Thursday, as surging oil prices, escalating US Treasury yields, and a decisively hawkish Federal Reserve outlook weighed heavily on equity markets. The Dow Jones Industrial Average fell for a third consecutive session, reflecting broader concerns about economic pressures. In other central bank news, the Bank of Mexico held its key rate at 6.5pc. US bond yields, a central focus for investors, climbed to multi-decade highs, driven by resilient US economic data and persistent inflation concerns. Brent Crude oil prices topped $107 a barrel amidst ongoing Middle East tensions, although reports emerged that US and Iranian negotiators were considering a deal to reopen the Strait of Hormuz and lift the US economic blockade on Tehran. For APAC investors, these global pressures, coupled with the upcoming Reserve Bank of Australia (RBA) policy meeting, set a cautious tone for the session ahead.
Markets
Major US equity indices closed mixed. The S&P 500 finished fractionally lower, closing at 7,704.13 with a -0.02% move. The Dow Jones Industrial Average extended its losses, ending the day at 51,349.98, down -0.31%. In contrast, the Nasdaq Composite eked out a marginal gain, closing at 26,939.37, up 0.01%.
US Treasury yields surged across the curve. The benchmark US 10-year Treasury note yield climbed 4.80 basis points to 5.162%, reaching levels not seen since July 2007. The US 30-year Treasury bond yield rose 6.00 basis points to 5.461%, hitting its highest level since June 2004. The US 2-year Treasury note yield also increased, standing at 4.941%.
Commodity markets saw significant moves. Brent Crude traded at $107.30, up 4.09%, topping $US107 a barrel. WTI Crude also climbed, trading at $94.96 for a 3.04% gain. Gold traded down slightly at $4,305.90, a -0.29% decline, while iron ore was largely flat. Bitcoin edged up 0.07% to trade at 84,442.
In currency markets, the Australian Dollar (AUD) weakened against the greenback, standing at 0.7013, a -1.40% move.
Looking to the APAC session, ASX 200 futures were down 32 points or 0.4 per cent to 8706 near 6:30am AEST (20:30 ET), pointing to a lower open for Australian shares. In its last completed session, the ASX 200 closed higher at 8,765.30, up 0.38%. The yield on the Australian 10-year note was 5.37%.
What Drove Markets
Markets are confronting a “triple macro headwind” of elevated oil prices, rising bond yields, and a hawkish Federal Reserve. King Lip, chief strategist and partner at BakerAvenue Wealth Management, noted that “while any one of these factors might be manageable, all three simultaneously pressure equity valuations.”
The bond market is identified as critical, with the sustained surge in yields raising concerns about the duration of elevated rates. Pantheon Macroeconomics’ Samuel Tombs commented that higher Treasury yields, while a logical consequence of resilient growth, appear overdone, linking the surge partly to energy prices from the Iran War and less encouraging core inflation trends. Meanwhile, 3Fourteen Research adjusted its strategic recommendations, upgrading bonds to benchmark weight and lowering cash to underweight. This surge in yields is impacting housing, corporate borrowing, private markets, and equity valuations.
Energy remains a key swing factor. Oil prices continued to climb amidst conflicting headlines about US and Iran talks and Houthi attacks on Saudi targets, feeding into inflation concerns. A sustained decline in crude prices could potentially ease inflation fears, relieve pressure on Treasury yields, and allow the Fed more patience.
Hawkish Federal Reserve expectations intensified following strong US economic data. S&P Global’s manufacturing and services purchasing managers’ indexes suggested US business activity accelerated for a fourth straight month in September, registering the fastest pace of growth since July 2021. S&P Global also noted that US price pressures intensified in September, with average input costs jumping to their highest rate since October 2022, primarily driven by higher fuel and transport costs. Fed funds futures trading now suggests a nearly 71% likelihood that the Federal Reserve will lift its key rate once more in October, compared to approximately 55% a week prior. This sentiment was reinforced by recent comments from Fed officials; Fed Governor Michael Barr stated that further “policy adjustments” were likely, and Philadelphia Fed President Anna Paulson said that “modest further tightening may be warranted” to combat persistently elevated inflation risks.
In other geopolitical developments, Chinese President Xi Jinping made his first US state visit since 2015, meeting President Donald Trump to discuss security, technology, artificial intelligence, and trade relations.
For the upcoming Reserve Bank of Australia (RBA) policy meeting on Tuesday, analysts anticipate a 25 basis point hike, which Capital Economics suggests could be the last in the current tightening cycle. However, TD Securities indicates the RBA may reinforce the possibility of further tightening but does not foresee a follow-up hike in November or December.
Stocks to Watch
Meta Platforms (META) rallied 4.50% to close at 777.59 after unveiling camera-free smart glasses and a dedicated gadget for its new AI assistant, Muse, contributing to the Nasdaq’s performance. Conversely, Oracle (ORCL) fell 3.47% to close at 139.54 after Bloomberg News reported the company was citing force majeure related to a data center project in New Mexico. Among other AI hyperscalers, Alphabet (GOOGL) saw a gain of 1.34% to 342.36, while Microsoft (MSFT) shed -0.53% to 497.93, and Amazon (AMZN) was little changed, up 0.04% to 249.38.