Time to take a breather, Oil price pullback helps markets recover

As we move into the second half of the week, the oil price is dipping and there are signs of stabilisation in the bond market and in stocks. US indices snapped a 3-day losing streak on Wednesday, Asian indices rose overnight and futures prices point to more stabilisation today, with the FTSE 100 expected to open higher. Treasury yields are also easing on Thursday, after the 10-year Treasury yield rose to a multi-year high on Wednesday. 

This does not mean that inflation concerns have gone away or that bonds won’t sell off again. 10-year US Treasury yields are still higher by 13bps this week. However, after a rough start to September, it could be time to take a breather, and UK and European yields may follow suit. UK yields have been under intense pressure this week, but the sell off eased on Wednesday and we expect UK yields to moderate further on Thursday. 

What will it take for markets to recover? 

For a recovery in market sentiment to be sustained, we would need energy prices to pull back to early summer levels. Brent and WTI prices are both lower today, Brent is lower by 1% and is trading around $94.50 per barrel, after President Trump said that renewed hostilities with Iran would not last long. However, the President also said that the US is prepared for more military strikes at any time, and US ally Kuwait said that it is still facing Iranian missile strikes. 

Until there is a complete stop to attacks from both sides it is hard to see commodity prices pull back in a meaningful way, or bonds stage a long term recovery as central banks will remain wary about inflation risks. 

Get used to a high-rate environment 

It is also worth noting that natural gas prices in Europe remain elevated and above $70, their highest levels since 2023. And we do not think that central banks will shift from their hawkish stances any time soon. 

US and European stock futures are improving as we wait for the market to open, although the Nasdaq and the S&P 500 are both pointing to a  mildly lower open later today. However, futures for the FTSE 100 have turned positive. 

Payrolls in focus 

The focus will shift to Friday’s US payrolls report, which could seal the deal on a September rate hike from the Fed. There is already a 62% chance of a hike priced in, but a stronger than expected payrolls reading, that bucks the trend of recent lower jobs growth in the US, could see this rise even further. 

Improved relations for China/US 

News that Donald Trump and President Xi will meet in Washington later this month could calm fears that the fighting between Iran and the US will be ongoing. The war will loom large over the summit, especially since the latest round of US sanctions on Iran could target its trading partners, including China. 

While summits between Xi and Trump have yielded fairly minimal results in the past, it could ease fears about trade wars between the world’s two largest economies, especially as Trump has been targeting trading partners in recent weeks. 

Broadcom fails to deliver strong enough results, but will it impact the AI trade? 

The AI trade will also be in focus on Thursday, after Broadcom’s results last night. The chip giant posted stronger profits, with earnings per share at $3.32, beating expectations of $3.24. Revenue for last quarter was also stronger at $29.59bn. However, the stock price was volatile after the company’s current quarter guidance fell short of expectations at $34.8bn, markets had been expecting $35.03bn. 

Lofty expectations have been an issue for other companies linked to the AI trade because growth has been so rapid in recent years. Broadcom’s share price initially dipped by 5% even though revenue rose by 86% compared to a year ago and profits tripled. 

The company has been a big winner from the AI capex binge. It designs custom chips for the likes of Google, Meta and OpenAI, however, its share price has lagged its peers and the overall market, and is up only 4% this year. It is down 4% in the past month. 

Broadcom and the bigger AI picture 

Broadcom managed to claw back early post-market losses, but the stock price fell by 1.9% overnight. If revenue guidance is not meeting expectations, it could be a sign that the capex boom is showing early signs of cooling down, which could hit the entire chip sector hard. 

For now, a sell off in Broadcom shares looks fairly contained. Nvidia’s share price rose in overnight markets and losses for Micron and AMD have been mild so far. However, if Broadcom’s results do spook the market, and there is a sell off in AI  names later today, it could be tough for the US indices to stage a recovery. 

Overall, Broadcom’s results suggest that if companies are reliant on hyperscaler spend, it does leave them exposed to changes in their AI strategies. Overall, it will be worth watching the chip sector closely later today.