Capital Idea: Market wrap, 11 Sept

• Crude price surge on intensifying risks to global energy markets

• Wall Street dips and precious metals plunge as bond yields jump

• US CPI data comes into focus as probabilities of US rate hikes rise

Crude prices have surged, putting downward pressure on equities and upward pressure on US rate hike expectations, with the rally reigniting genuine concern about the global growth and inflation outlook. The price action in oil is beginning to look uncomfortably similar to the volatility experienced at the start of the US–Iran war, where military strikes and the prospect of a protracted conflict saw the market price in a material risk to global energy supplies. Comments from US President Donald Trump that he sees the war ending after the US mid-term elections – as though it were an election promise – sparked concerns that the US is preparing for a war that will carry on in its current form at least until the end of the year. Meanwhile, strikes are continuing against tankers in the Strait of Hormuz; and, perhaps more concerningly, Houthi forces have claimed control of Bab-el-Mandeb, another energy chokepoint, in their skirmish against the Saudis, potentially deepening the energy shock.

(Source: TradingView)

(Past performance is not a reliable indicator of future results)

Surging oil prices sparked a significant move in rates and fixed-income markets, with the knock-on effects responsible for a fall in stocks and a sharp plunge in precious metals. The 2-year yield jumped by around 15 basis points to a more than two-year high, with rates markets ramping up the implied probability of a Fed rate hike next week to about 70%. This dynamic comes ahead of crucial CPI data from the US, which is expected to show a slight moderation in core inflation to 2.4% and could make or break whether the central bank hikes next week or holds off a little longer. It also follows PPI data in the US session, which, whilst missing expectations very modestly to the downside on a core basis, revealed an energy-driven jump in business costs. In addition to energy market and inflation dynamics, the upward pressure on yields was compounded after the US Treasury’s buyback programme fell slightly short of the expected US$6 billion value.

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