9th September - Metals Surge As Oil Hits $100
We have seen further escalation in the Middle East today as the US claimed to have destroyed 5 Iranian oil tankers, adding to renewed military exchanges across the region after yesterday's attacks on Saudi oil facilities. There are still no concrete signs of renewed talks despite Qatari efforts, which have caused oil to further rise and have seen Brent pass $100 per barrel, which it actually managed at the end of the US session yesterday before continuing north today. Brent is currently at $102.50, while US Oil sits at $93.80.
With no end in sight for the Iran conflict and oil above $100, we saw today the Fed rate hike odds rise to 60% for September, up from 58% yesterday and below 50% before last week's NFP figures. Fed Governor Michael Barr reinforced the hawkish tone on Tuesday, noting the Fed should be ready to raise rates should inflation stay sticky. Oil at over $100 per barrel will give us some sticky inflation indeed.
We have also seen US bond yields continue to rise today, with both the 2-year and 10-year making recent highs and the 30-year not far off. The fact that we have seen bonds rise like this whilst also seeing the USD fall brings us back to the theory floated at the start of August, that higher yields are not the catalyst for stronger Dollar demand as would normally be the case, but are instead a sign of a lack of faith in the US economy that is then reflected in a weaker USD. The commitment from Treasury Secretary Bessent has not changed the direction of bond yields meaningfully, so he now has to either double down on reducing long-term yields or accept they will stay higher. Either way, it is not good for the USD.
It is worth noting that tomorrow is the date Bessent advertised will be the day the bond purchases begin. This intervention is now 'up to' $6 billion as of today, having been $4 billion previously. It will be important to keep an eye on the yields for both short and long term to see how much of an effect this intervention will have and how quickly it will take effect.
Forex
The DXY fell a little despite hawkish commentary from Barr, though this was most likely due to the USD/JPY continuing to fall thanks to demand for the Yen. The USD outlook continues to look bearish, despite the now expected interest rate hike next week. We have seen a rate hike go from less than 50% to 60%, but have seen the USD fall in that period. A rate hike should be a purely bullish signal for a currency; the fact that it is not is telling. We have the crucial PPI and CPI prints tomorrow and Friday, but I am concerned that even hot prints will not give the USD the boost it needs.
The Yen has continued to show its strength, buoyed by the expected interest rate hikes by the BoJ. It still has not broken past the key 153.000 level in USD/JPY. Whether it does in the short term may depend on tomorrow's PPI print. In the long term, I think we may be seeing the unwinding of the USD/JPY carry trade, as rates are beginning to get closer and US confidence wanes.
Indices
A negative session across the board, with every major index I follow finishing in the red. The Dow led the US losses, falling 0.56% to 52,459, while the Nasdaq 100 dropped 0.17% to 29,439 and the S&P 500 fell 0.34% to 7,644. The Nasdaq Composite was the worst of the US indices, down 0.61% to 26,261.
The interesting detail is the split between the Nasdaq 100 and the Nasdaq Composite. The 100 fell just 0.17% while the Composite fell 0.61%, which tells us the mega-cap names held up considerably better than the broader market. That fits with what we have been seeing for weeks now, where money continues to concentrate in the largest names while the rest of the market struggles. It is worth remembering that this is precisely the narrowing breadth I have flagged as a warning sign several times over the past month, and days like today do nothing to ease that concern.
The falls were not confined to the US either. The FTSE 100 fell 1.04% to 10,650 and the Nikkei was the worst performer of the lot, down 1.19% to 64,264. The fact that the two international indices fell harder than any of the US ones is notable, particularly the Nikkei, which has the added pressure of a strengthening yen working against it. A stronger currency is a direct headwind for Japanese exporters, and with the yen having gained more than 4% over the past week on the back of BoJ hike expectations, the equity market is now feeling the consequences of that.
None of these are dramatic moves in isolation, but the direction is uniform and the cause is fairly clear. Oil reaching $100, a rate hike now priced at 60% for next week, and yields sitting near three-year highs is not a combination that supports equities. With PPI tomorrow and CPI on Friday, I would expect this cautious tone to persist until we have those numbers.
Precious Metals
Despite escalation in the Middle East and an increased expectation for rate hikes, metals have risen today. Gold is up 1% to $4,400, while silver is up 2.25% to $67.25. Earlier in the year, we saw any escalation in the Middle East negatively affect metals, as the rate-hike channel was overwhelmingly on top of any safe-haven demand. However, now that seems to have flipped, as higher rate hike expectations have not dampened metals demand. It seems that the market is currently more interested in mitigating against both geopolitical and monetary uncertainty than it is in maximizing returns. Metals seem to have regained their safe-haven status.
Tomorrow's Market Drivers
USD PPI Data, 1:30 pm UK time - The key release of the day, and along with CPI on Friday, the key data for the week. This will have a huge effect on rate-hike expectations, and so almost any figure (soft, hot, or on target) could move the market significantly.
GBP GDP, 7 am UK time - Key for the GBP, but will not move other markets, especially on the same day as the PPI print.
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