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Oil holds near US$100 and the Yen catches another bid

Preview: Crude flirts with US$100, equities close mixed & the yen holds recent gains ahead of a big week for US inflation data.

Brent circles US$100 territory

Geopolitics was front and centre once again. Iranian-backed Houthis struck four cities in southern Saudi Arabia, reportedly injuring about 70 people, a move that threatens a broader conflict in the Middle East. Couple this with news of the US striking Iranian tankers near Kharg Island, and it pushed oil benchmarks higher yesterday. Brent crude came within a stone’s throw of US$100/barrel by the close before modestly paring gains overnight in Asia. Clearly, this geopolitical risk premium is not going away anytime soon.

I noted yesterday that the US$100 region on Brent likely contains a cluster of sell orders, with stops perhaps set just north of the US$102 high established on 23 July. Rupturing this level, therefore, would technically open the door to a run towards daily resistance at US$108.40.

Equities mixed

In equities, European bourses wrapped up Tuesday’s session mixed (futures point to a weak open this morning), with US indices closing broadly in the red (futures, however, suggest a positive open later on). Breadth was poor in the S&P 500, with technology leading the decline while energy names picked up a modest bid, helped by record average US diesel prices.

Yen remains front and centre in FX

USD/JPY was once again the core focus in FX yesterday, with the yen short squeeze very much in play during early Asian trading. This pushed the pair as low as ¥152.88, breaching levels reached during the July intervention, before recouping some ground heading into the European session, a move that continued during US trading. The initial drop below the widely watched ¥155 has more to do with increased BoJ hike expectations forcing an unwind of carry trades than with intervention, given that no official confirmation has yet surfaced.

However, overnight, we have seen renewed JPY strength, with USD/JPY trading around ¥153.60. US Treasury Secretary Bessent has taken an unusually hands-on approach to currency and bond markets compared with his predecessors, and while coordinated intervention played a part in July's move, I believe improving Japanese fundamentals and, as I noted above, mounting expectations of BoJ tightening are doing much of the work now.

Fixed income: Buybacks in focus

Attention now turns to the first expanded Treasury buyback operation, expected to total between US$7bn and US$10bn, alongside a 30-year auction on Thursday. MoF data confirm that Japan's Treasury holdings have dipped below US$1 trillion, as it opted to sell rather than tap a Fed borrowing facility Bessent had floated.

Thin data slate ahead – All eyes shift to ECB and US PPI

Tomorrow, of course, things begin to finally heat up on the macro side, with an ECB update expected to raise all key benchmark rates. That said, I do not expect the decision to move the market’s needle, as that is firmly baked in. I also do not anticipate that we will get much from ECB President Christine Lagarde, with attention squarely on the updated economic projections to determine how hawkish the bank is.

Ultimately, it is the two US inflation reports – August PPI on Thursday and CPI on Friday – that are top of mind for investors this week, ahead of next week’s Fed meeting. The OIS curve suggests there remains about a 50% chance that the Fed pulls the trigger and increases the target rate, with a total of 35 bps of tightening implied by year-end – that’s one hike and about a 40% probability of another over three meetings!

Author

Aaron Hill

Aaron Hill

FP Markets

After completing his Bachelor’s degree in English and Creative Writing in the UK, and subsequently spending a handful of years teaching English as a foreign language teacher around Asia, Aaron was introduced to financial trading,

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