Oil and bonds front and centre

Preview: Gulf tensions send oil and global bond yields surging, dragging equities lower; the kiwi also took a hit after a dovish RBNZ hike.

Oil and bond yields rise

Brent crude rallied nearly 5% yesterday, touching levels north of US$95/barrel, with further outperformance in the Asia-Pac session – although prices are off their session highs as of writing. The push higher came amid escalating tensions between the US and Iran in the Gulf and disruption in the Strait of Hormuz. This has added fuel to an already anxious inflation picture and is a key driver of the global bond yield rally.

The benchmark US 10-year Treasury yield clocked a high of 4.8%, its highest level since late 2023. 30-year yields are also approaching 5.3%, effectively wiping out the impact of US Treasury Secretary Scott Bessent’s ‘buyback’ intervention announcement last month.

This is not an isolated story; it is global. 10-year Japanese JGBs rose to 3%, a level not seen in 30 years. 10-year UK Gilts hit 5.26%, their highest since 2008, which does little to help new UK PM Burnham. I could go on. German bund yields, French OAT futures, and Australian yields are all touching gloves with multi-year highs. Behind this global bond rout, of course, are inflation concerns. We also have soaring government debt, as well as a wave of bond issuance from tech firms funding AI expansion.

Equities lower across the board

In equities, US benchmarks ended lower, with the Nasdaq 100 shedding 1.3% and dipping a toe under the 50-day SMA around 29,225. A similar read-through played out in Asian equity markets overnight; South Korea's Kospi dropped almost 4%, the Nikkei fell nearly 3%, and the broader MSCI Asia-Pacific index lost around 2%.

FX: NZD slips on dovish RBNZ and AUD steady after GDP data lands

For FX, NZD was a clear underperformer overnight, and remains firmly in the red against its G10 peers. While the RBNZ increased the OCR by 25 bps, which was expected, the MPR indicated that the central bank expects a shallower tightening cycle than markets had priced. This led to a dovish repricing in the OIS curve and, as I mentioned, a fall across NZD pairs. The move also offered a picture-perfect opportunity to scalp out of this event!

We also had Australian Q2 26 GDP numbers land overnight. Although the data beat expectations, the deviation was not enough ‘juice’ for the market to react, hence the lacklustre response in AUD, which is currently trading unchanged against the USD as of writing.

Eurozone inflation ticks higher, cementing ECB hike next week

In other macro news, the August eurozone CPI inflation figures hit the wires yesterday, showing YY headline inflation at 3.3%, up from 2.9% in July. The rise was almost entirely driven by a 14.3% increase in energy prices (from 10.3%).

However, while core and services prints cooled, money markets are fully pricing in a 25 bp rate hike next week, and the flow of ECB speak is backing this up, so near-term the setup is EUR-supportive. Markets are also pricing another rate hike down the road by year-end (47 bps).

We then had a mixed US August ISM manufacturing PMI come in lower than expected at 54.6, with prices paid beating estimates and employment missing, echoing a stagflationary release. 

BoC decision ahead

Up ahead, we have an update from the BoC. Markets and economists expect the central bank to keep the overnight rate on hold at 2.25%. The rate decision is therefore unlikely to move markets.

Ahead of the event, year-end OIS pricing suggests 14 bps of tightening for the BoC, and data shows GDP growth and an improving jobs market. However, the biggest issue right now is trade between the US and Canada. The US has imposed 50% tariffs on US$20 billion of goods, and Canada retaliated by announcing tariffs expected to take effect this month. Given this uncertainty, I do not see the BoC making much change here until things become clearer.