Oil prices are rising on Wednesday as tit-for-tat strikes between Iran and the US threaten oil supplies as the two sides battle for control of the Strait of Hormuz. Stock futures have switched their attention from a strong earnings season to the challenges ahead, including a 10-year Treasury yield that is hovering close to the 4.8% level. European and US indices all point to a lower open later today, as the environment for risky assets hits a speed bump.
Why $100 oil matters
The oil price is climbing further on Wednesday as Middle Eastern energy supplies have been actively targeted in the latest escalation of the conflict. Brent crude oil is mere cents away from reaching $100 per barrel, and is up a further 1% on Wednesday. $100 is a psychological level that matters for markets. If the oil price rises above this level it will give many central banks no choice but to hike rates, it will increase costs for businesses and consumers and ultimately could weigh on economic growth.
Still no TACO
There is no sign yet of the TACO trade, and President Trump does not seem in a hurry to deescalate the situation.
Winter of Discontent, as natural gas prices surge
Some analysts argue that movements in the oil price could be worse. The price for Brent crude did not immediately surge to $100 per barrel or higher after the resumption of attacks in the Middle East. The reason is that exports of oil from the Persian Gulf have remained elevated, and were more than likely to be higher than data suggests. This is not the case for Natural Gas, as Qatar’s LNG exports are taking longer than expected to return to pre-war levels.
This is why European Natural Gas has risen to its highest level since 2022, and has surpassed the highs reached when the war first broke out in February. The fact that we are moving into winter and European gas stocks are low is sending the Nat Gas market into overdrive, and is one reason why the price has spiked above $78. If prices stay at this level then this is what a winter of discontent could look like.
USD/JPY: don’t fight the Treasury Secretary
The yen is strengthening once again on Wednesday, after US Treasury Secretary, Scott Bessent dared traders to bet against the yen. USD/JPY is close to the 153 handle this morning, as intervention is holding for now. While Beesent’s comments may sound bizarre, it is true. The US will do what it takes to protect its Treasury market and prop up the yen. Bessent has signalled this is the end of Abenomics, and the BOJ are likely to back him up with a rate rise next week.
A move back to 150 in USD/JPY is desirable for the Japanese and US authorities. We do not expect a broad move lower than this in the short term, as it could become a disorderly unwind of the global carry trade, which could also have negative implications for global financial markets.
Stocks feel the heat
As we move into the middle of the week, stocks are starting to feel the heat from geopolitical risks. US and European stock futures are pointing to a lower open today. US stocks closed lower on Tuesday, the Dow Jones fell more than 1% and there is a clear preference for European indices during this period of stress. The FTSE 100 suffered a mild loss on Tuesday, the Dax index was flat and the Cac managed to rise by 0.1%. We will need to see if European stocks follow US indices lower on Wednesday.
Why is volatility not higher?
Stock market volatility also increased on Tuesday, but it remains at low levels. Overall, the backdrop for markets is extremely reactive to changes in interest rate expectations and energy prices. Volatility is likely to persist even if the Vix index remains contained for now.
Can the foldable iPhone keep Apple at the top of the Magnificent 7?
Apple is also in focus as the market waits for its latest product launch later today. A foldable iPhone and the new iPhone 18 are expected to be unveiled. The stock sold off 1% on Tuesday, however, it is still higher by 16% YTD, and is the second best performing stock in the Magnificent 7 so far this year.
If the launch goes well, then we could see further gains. However, that will depend on how the foldable iPhone, in particular, is received and whether analysts think consumers will upgrade. Apple’s latest pricing strategy will also be scrutinised.
Gearing up for CPI
Overall, the spike in energy prices complicates the picture for the US CPI report on Friday. If inflation right now is rising, then the August CPI report is already outdated. Even if August CPI is weaker than expected, fears will remain about where CPI could go next, which limits the chance of a recovery in global bonds or a reduction in Federal Reserve rate hike expectations.
Until the tensions in the Middle East ease, it is hard to see the following market moves:
- A recovery in bonds
- A boost in the gold price
- A recovery in stocks
Change is on the agenda for financial markets this September, and it could be a painful adjustment.
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