Oil climbed back above $100 a barrel during Thursday’s European session while government bond yields in the United States, Germany and Japan pushed toward fresh multi-decade peaks, leaving equity markets mixed at the start of a new quarter. Brent crude rose 2.1 percent to trade near $100.10 and West Texas Intermediate gained 1.5 percent to $91.78, per figures carried by BNN Bloomberg and the Associated Press. It was the first time Brent had passed $100 since July, when fighting between the United States and Iran escalated and pushed the global benchmark to triple digits in early September.
The bounce came despite signs that Gulf supply is recovering. Crude exports from the region have climbed back close to pre-war levels and Saudi Arabia has partly restored its East-West pipeline, which bypasses the Strait of Hormuz. Traders, judging by the tape, are pricing the recovery skeptically. United States and Iranian officials have given conflicting accounts of whether any deal is close. Iranian officials said Wednesday they had received an official American response, while President Trump denied reports he was willing to ease sanctions. Crude prices had already risen about $1 a barrel on Wednesday on stalled talks and tight fuel markets, logging steep monthly gains.
Chinese refiners added a trickle of supply-side support early in the Asian session, reportedly banning October fuel exports, news that pushed Brent back above $100 in Asian hours before it consolidated in Europe. Oil is a bigger factor for financial markets this year than usual because fuel costs have shown up in consumer inflation readings across Europe. Spain’s September inflation print came in at 4.9 percent, driven largely by fuel prices, and the pattern repeats elsewhere in the eurozone.
Bond markets set the pace
The bond selloff dominated risk sentiment more than crude did. The 10-year US Treasury yield traded near 5.28 percent after an intraday peak of 5.307 percent on Wednesday, its highest since 2007, and the 30-year hovered around 5.62 percent after touching its strongest since 2002. Long-dated yields have now risen even as the 10-year real, or inflation-adjusted, yield reached 2.90 percent on September 28, up from 2.44 percent at the end of August, according to Bitfinex’s monthly outlook published Thursday. Diesel prices add a second warning: the EIA’s weekly diesel print eased to $6.382 a gallon on September 28, the first weekly fall in the run, but still $2.628 above a year earlier, feeding directly into freight and consumer costs.
Sovereign borrowing costs rose from the United States to Germany and Japan on heightened inflation uncertainty, Reuters reported, and the quarter that just ended was the worst for US Treasury bonds since 1994. Equities had already paid a price: the Dow finished Wednesday down 443 points, and the S&P 500 and Nasdaq blended to a mixed close despite an intraday tech rally sparked by Micron Technology’s record quarter. Nasdaq 100 futures recovered 0.8 percent and S&P 500 futures added 0.4 percent late in New York, which carried a modestly risk-positive tone into Asia.
Asian equities outperformed on Thursday. Japan’s Nikkei jumped 2.7 percent and South Korea’s Kospi rose 1.2 percent, helped by Micron’s upbeat forecast, which lifted chip shares across the region. European stocks fell. The Bank of Japan’s Tankan survey, published Thursday, showed large manufacturer sentiment at 24, a point below forecasts, with the December outlook slipping to 21, a hint that the region’s largest oil importer sees energy costs eating into factory confidence even without the war in the Sands.
Emerging markets take the hit
Investors stayed bearish on most emerging Asian currencies as high oil prices fueled nagging current-account worries in oil-importing economies, according to a Reuters poll of analysts published Thursday. Currencies from India to Indonesia faced renewed pressure, with local rate-hike expectations being repriced as the dollar strengthened against a backdrop of stubbornly high US yields. For central banks from Manila to Jakarta, an oil price near $100 tightens the trade-off between defending the currency and supporting growth. Pakistan, Bangladesh and Sri Lanka, which import most of their crude, face the sharpest squeeze because import bills rise just as remittances from Gulf-based workers feed back into their own current accounts.
The calendar for October does not offer much relief. The Federal Reserve meets October 27-28, with fed funds futures pricing a 52.9 percent chance of no change against 47.1 percent odds of another hike, after the central bank raised its benchmark rate to 3.75-4 percent in September. September CPI arrives October 14 and September PPI the following day, and the Fed’s preferred gauge, core PCE, lands on October 29, one day after the meeting itself, so the committee will act without the data it targets. The next FOMC gathering without a Summary of Economic Projections leaves the statement and press conference as the only guidance on record.
The quarter’s reset has been expensive. Over the previous three months through September 29, the Nasdaq gained about 5 percent and the S&P 500 roughly 4 percent while gold added less than 2 percent, so an oil benchmark above $100 and a 10-year yield above 5.2 percent entering October leaves investors choosing between cheap-looking equities in nominal terms and expensive-looking ones in real terms. Neither camp has much room for error if the bond selloff resumes its pace. For now, money managers are treating crude above $100 and long yields above 5.5 percent as the same trade: a tax on growth assets that the market has started pricing in but not yet accepted.