2nd September - Oil Continues Higher
Yesterday we saw a fresh round of US airstrikes on Iran following the weekend flare-up, along with further warnings from Trump. Oil extended its gains as a result, with the market now pricing in the possibility of sustained military exchanges rather than the isolated incidents we saw in August. Energy was the best performing S&P sector on the day, up 1.3%. It is worth remembering how quickly this has turned. Ten days ago we were discussing whether the war premium was coming out of the oil price. It is now firmly back in, and it has arrived at the worst possible moment for the Fed.
The bigger story, though, is in the bond market, and it is one I want to spend some time on because I think it is the most important thing happening at the moment. The 10-year yield rose to 4.79% yesterday, its highest intraday level since January 2025, while the 30-year climbed to 5.27% and is back near multi-decade highs. On the 19th of August the Treasury announced it would double its buybacks of long-dated debt, and the 30-year duly fell to around 5.18%. I described the action at the time as a sticking plaster on a gaping wound and compared it to the BoJ's interventions in the yen, which bought time but never changed the direction of travel. Two weeks on, the 30-year is back at 5.27% and the 10-year is at levels we have not seen in twenty months. The intervention has not simply faded, it has been completely overwhelmed, and yields are now higher than they were before it was announced.
Yesterday I wrote about the conflict between the Fed and the Treasury and said it would be an interesting thread to follow for the rest of the year. It looks as though we may already have our answer, and the Treasury is losing.
Forex
The hawkish repricing continues to support the dollar, with EUR/USD falling 0.22% to 1.1592, GBP/USD down 0.24% to 1.3515 and AUD/USD down 0.31% to 0.7144. The Aussie has now given back the majority of the gains it made following last week's hot inflation print, which tells you how dominant the US story has become.
The one I am watching most closely is USD/JPY, which closed above 160 at 160.17 having reached a high of 160.27. That is the zone that prompted intervention back in July, and we are now back there with US yields at twenty-month highs and the rate differential widening again rather than narrowing. The BoJ's problem has returned in full, and it has returned in a considerably less favourable environment than the one it faced last time. In July, Japan intervened into a weakening dollar, which is why it worked as well as it did. Intervening against a dollar that is being pushed higher by genuine rate expectations is a different proposition entirely, and a much harder one. I would expect the BoJ to wait until we reach close to the levels we were at in July before considering an intervention, but if they do so it will take far more to move the market in the same way.
Outside of the USD, we saw the RBNZ rate announcement overnight where they hiked rates as expected. The market reaction however, was to sell the NZD, as the RBNZ gave an unexpectedly dovish guidance for future decisions. As of writing the NZD/USD pair is already down a full 1% on the day thanks to both the dovish commentary and recent USD strength. The AUD meanwhile saw Australian GDP come in at 0.4% against an expected 0.3%, which combined with the dovish NZD news had caused the AUD/NZD to take off.
Indices
An ugly start to September, with the Dow falling 0.79% to 52,767, the S&P 500 down 0.71% to 7,631, the Nasdaq losing 1.03% to 26,099 and the Russell 2000 the worst of the lot, down 1.23% to 2,920. Only four of the eleven S&P sectors finished higher, with energy leading and consumer discretionary the biggest laggard, down 1.9%.
The mechanism here is straightforward enough. Higher long-dated yields raise the discount rate applied to future cash flows, which hits high-duration growth stocks hardest, and that is why the Nasdaq and the Russell took the worst of it while the Dow held up comparatively well. It is the same rotation we have been tracking all year, simply expressed through the bond market rather than through AI capex concerns.
The VIX rose nearly 10% on the day, having closed below 15 on Monday for its lowest monthly close since November 2024. I flagged last week that we were heading into the most seasonally volatile stretch of the calendar with hedging at its cheapest of the year and almost no protection in place. That has turned rather quickly. It is also worth putting the day in context, as August was a strong month with the S&P up 2.62%, the Nasdaq up 3.93% and the Dow up 1.34%. A meaningful chunk of that has been handed back in a single session.
Precious Metals
The selling accelerated. Gold fell 2.27% yesterday and is down again this morning, while silver fell 2.83% and has continued lower. From their respective peaks, gold is now down around 8.9% and silver around 11.3%, which means silver's entire move from the middle of August has been erased in three sessions.
This has gone well beyond the retracement I was waiting for and has become a proper correction. Yesterday I flagged the confluence on the gold chart, with the roughly 50% retracement of last month's move coinciding with a key resistance level and the 200-day moving average. Price has now gone straight through it, which is not what you want to see if you were hoping this was a temporary reaction. Of the three scenarios I laid out, the third one, a larger and more significant change in sentiment, is the one currently winning.
The mechanism is the one I have described all year and it is worth restating because it explains everything. Rising oil lifts inflation expectations, which lifts yields, which crushes assets that pay you nothing to hold them. The confidence trade that carried gold through August has been comprehensively overwhelmed by the rate channel, now that Warsh has committed to fighting inflation and made clear that monetary policy will not bend to fiscal pressure.
We have been waiting a while for an entry in these markets to ride the trend higher. A correction of this speed and depth does not usually stop cleanly at a technical level, and with yields still climbing and oil still rising, there is nothing in the current backdrop that argues for stepping in yet. My longer-term view has not changed, but the near-term picture has deteriorated significantly and I would rather be late to this than early.
Today's Market Drivers
US ADP Employment, 1:15pm UK time - The warm-up act to Friday's NFP, and it lands with the JOLTS hiring rate already at a seven-month low.
BoC Interest Rate Decision, 2:45pm UK time - Expected to hold, with any forward guidance the thing to watch.
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