Wall Street fell for a second straight session on Monday as the 10-year Treasury yield climbed to 5.24 percent, its highest level since June 2007, and markets raised the odds of another Federal Reserve rate hike at the October meeting to roughly 70 percent.
The Dow Jones Industrial Average closed down 347.11 points, or 0.67 percent, at 51,481.51. The S&P 500 lost 59.72 points, or 0.77 percent, to finish at 7,683.69, its largest daily percentage drop since August 20. The Nasdaq Composite fell 248.34 points, or 0.92 percent, to 26,820.38, with technology and growth stocks bearing the brunt of the move as long-term yields rose through the session.
Selling pressure was heaviest in the morning, when all three indices were down more than 1 percent at the lows. A midday rebound followed reports from CNN and Axios, citing White House officials, that Trump could consider easing sanctions on Iran regarding the nuclear issue. That was enough to pull oil off its highs and lift stocks off the floor, but not enough to turn the day positive.
Oil and the ceasefire deadlock
The proximate driver was energy. President Trump rejected an Iranian proposal over the weekend that would have reopened the Strait of Hormuz and restarted nuclear negotiations within seven days in exchange for a ceasefire, an end to the maritime blockade and unfreezing of Iranian assets. Oil jumped more than 4 percent intraday on the news before paring gains when the sanction-easing reports surfaced.
November Brent crude settled up 0.92 percent at $105.28 a barrel. West Texas Intermediate for November delivery rose 0.21 percent to $92.60. Iranian Foreign Minister Abbas Araghchi was set to meet Qatari mediators in New York on Monday, and traders treated the prospect of continued talks as the only reason crude finished well below its session highs.
The physical market shows the strain even when futures prices wobble. Brent’s prompt spread, the gap between its two nearest contracts, has widened to more than $7 a barrel from under $1 at the end of last month, a sign buyers are paying up for immediate delivery rather than waiting. Availability of very large crude tankers has shrunk since the war began, sending shipping rates to record highs. UK average diesel prices hit a record just shy of two pounds per litre, according to the RAC motoring organization. Brent is up more than 75 percent this year.
The bond market moves first
The 30-year Treasury yield climbed to 5.561 percent, its highest since June 2002. The move extended a selloff that began last week with strong PMI data, a poorly received five-year auction and the oil spike. The Treasury even bought back $4 billion of long bonds on September 24, and yields rose anyway, which tells you the selling is not about supply mechanics.
Fed Governor Lisa Cook said on Monday she expects continued inflationary pressure in coming months from AI-driven demand and higher oil prices, though she stopped short of saying more hikes will be needed. Markets did the talking for her. CME FedWatch put the probability of a 25 basis point hike at the October FOMC meeting at 70.3 percent, up from 57.6 percent a week ago and just 17.7 percent a month earlier. A month ago a hike was a fringe scenario; now it is the base case.
European natural gas prices also rose, and European equity indices closed flat to slightly lower, with London and Frankfurt down 0.1 percent each and Paris unchanged. Asia had ended mixed after Washington and Beijing extended their trade truce at the end of last week. Japan, Australia and New Zealand government bonds all fell as the Treasury selloff spread across global debt markets.
The spillover is visible in emerging markets too. Indian equities fell hard on Monday, with the Sensex dropping roughly 1,000 points as all 30 of its constituents closed lower. India imports most of its crude, and a weakening rupee plus yields above 5.2 percent left foreign investors with little reason to stay. The Reserve Bank of India has already cut its growth forecast for the coming fiscal year, citing energy prices and a below-normal monsoon.
What to watch this week
The data calendar is heavy. August PCE inflation, the Fed’s preferred gauge, arrives September 30. ISM manufacturing follows October 1, with the US jobs report the next morning. CPI comes October 14, and the FOMC meets October 27-28. The payrolls report is the release most likely to move the October hike odds decisively in either direction, since the case for tightening rests on an economy that is growing faster than the Fed wants at current oil prices.
For equity investors the math is uncomfortable. Higher yields raise discount rates on future earnings, which hits growth stocks hardest, while elevated oil squeezes consumer margins and transport costs. Meta fell 4.8 percent, AMD dropped 3.6 percent and Micron lost 2.6 percent on Monday. Amazon and Microsoft each declined around 1 percent.
The one benign reading: gold has actually fallen from its summer highs as the stronger dollar makes the metal more expensive for non-dollar buyers, according to AJ Bell investment director Russ Mould. Investors seeking a war hedge have been getting it from energy and short-dated Treasuries instead.
Unless the Qatar-mediated talks produce a visible breakthrough this week, the path of least resistance for yields remains higher, and the Fed’s October decision increasingly looks like a coin flip weighted toward tightening. Equity bulls need either cheaper oil or a dovish surprise in the data. Neither looks likely before Friday.