Oil jumps and yields climb as US-Iran tensions flare up

The final trading day of August saw US equity benchmarks end underwater; The S&P 500 slipped about 0.4%, the Dow fell about 0.5%, and the Nasdaq 100 also traded lower as the session progressed. Despite the pullback, there was little spillover into Asia-Pac trading, with key regional indices modestly underpinned.

Tensions in the Gulf underpin Oil prices

Middle East tensions ratcheted higher over the weekend after the US launched fresh strikes on Iran’s Larak Island on the basis that the US observed Iran was preparing to deploy mines in the Strait of Hormuz. This is the first publicly acknowledged strike since July, with Iran retaliating by targeting US bases in Jordan and the UAE.

With additional strikes possible – US President Trump recently told a Fox News reporter that the US was going to hit Iran hard in response – and secondary economic sanctions on Iran also in play, uncertainty remains high.

This naturally underpinned a bid in oil benchmarks at the open yesterday, sending WTI and Brent crude up around 4% before gains were modestly pared by the close. Brent continues to trade above US$90/barrel this morning, with chart studies suggesting further outperformance and daily resistance between US$100 and US$97.94 calling for attention overhead.

Yields push higher

Global bond yields were also higher across the curve yesterday amid Gulf tensions and rising expectations that the Fed may soon pull the trigger and raise the target rate.

The 10-year US Treasury yield rose to its highest level since early 2025 at 4.75% and is on the front foot as I write this. Interestingly, Japan’s 10-year JGB clocked 3% in recent trading – a level we have not seen since late 1996. 

Yen in the crosshairs

In the FX space, the JPY caught a modest bid on reports that US Treasury Secretary Scott Bessent said he expects the BoJ to take steps to strengthen the yen. While the market does not doubt the BoJ will tighten policy, the question is the timeline: markets are currently 50-50 on the BoJ meeting this month, with October fully priced in.

Historically, as we know, the BoJ is generally slow to act. Reporting yesterday also highlighted that Japan’s Finance Minister Satsuki Katayama said that both the US and Japan have agreed to continue coordinating to achieve an orderly yen.

Day ahead: Eurozone inflation and ISM data in focus

The August eurozone CPI inflation data lands today at 9 am GMT. Economists expect YY headline inflation to reach 3.3%, up from 2.9% in July (est. range between 3% and 3.4%), with the YY core reading forecast to remain unchanged at 2.5%. The ECB next meets on 10 September, with markets pricing in a rate hike (24 bps).

While headline measures are expected to rise on the back of higher energy prices, a surprise in core and services inflation will drive volatility. If they come in higher than expected, this will seal the deal for an ECB rate hike next week (markets are nearly fully pricing in a rate increase) and give the EUR some footing above the US$1.1600 handle. As of writing, second-round effects have been minimal, with wage growth relatively contained.

In addition to this print, the August ISM manufacturing PMI data is due at 2 pm GMT. Economists anticipate a mild deceleration at the headline level to 55.2 from 55.6 in July, though prices paid (expected to ease to 70.5 from 71.1) and employment (forecast to rise to 53.0 from 52.8) will take centre stage. Should prices and employment rise, this would complicate the Fed’s disinflation story and perhaps increase rate-hike bets, thereby lifting the USD. Fed pricing for this month's meeting is essentially a coin flip right now (13 bps of tightening implied).