Global stocks fell on Monday, as oil prices rose due to the ongoing stalemate in US-Iran talks. Brent crude futures increased by 4% to $108.5 per barrel, marking a 20% gain since early September. Oil prices have surged by around 50% since the start of the war in late February, with refined product prices rising more sharply. This development has contributed to the downward pressure on global equities.
Investors are increasingly pricing in a higher interest rate environment, with the market assigning a 68% probability to a Federal Reserve rate hike in October. This would be the second consecutive rate increase, with around 90 basis points of monetary tightening priced in by the end of next year. The yield on US two-year Treasury bonds, which is most sensitive to changes in interest rate expectations and inflation, jumped by 56 basis points in September. This represents the largest monthly increase since February 2023.
The rise in short-term bond yields has led to a flattening of the yield curve, with the gap between two-year and 10-year Treasury yields narrowing to around 30 basis points. This move is seen as a sign of increased expectations for future rate hikes. The yield on two-year Treasury bonds rose by 5 basis points to 4.914%, while the yield on 30-year bonds increased to 5.52%. The 10-year yield rose by 4 basis points to 5.22%.
The increase in capital costs is putting pressure on technology companies, particularly those reliant on artificial intelligence. These companies, often referred to as tech giants, depend on billions of dollars in borrowing and spending to fund expansions of their data centers and infrastructure. The higher cost of capital is expected to weigh on these companies' growth prospects.
According to Stephen Major, global chief economist at Tradition, market-based inflation expectations have remained relatively stable. He noted that the rise in nominal Treasury yields primarily reflects an increase in real yields and a shift in monetary policy expectations, rather than an unconstrained increase in inflation risk premia.
Global equities were negatively impacted by these developments, with the MSCI global stock index falling by 0.2%. The S&P 500 and Nasdaq futures declined by 0.5% and 1%, respectively. In contrast, the European Stoxx 600 index rose by 0.1%, supported by gains in oil and gas stocks. Asian markets were mixed, with Chinese stocks falling by 1.9% to a one-year low.
The dollar index rose to 101.39, its highest level in two months, while the euro declined to $1.1383. Gold prices fell by 3% to $1,951 per ounce, marking a 7% decline for the month. The increase in bond yields has reduced the appeal of non-yielding assets like gold, contributing to its decline.
Key points
- Global stocks decline as oil prices surge and investors price in higher interest rates
- Investors expect a 68% chance of a Federal Reserve rate hike in October
- The rise in bond yields has put pressure on technology companies and reduced the appeal of non-yielding assets like gold
