Bonds, stocks jolted as Middle East tensions shatter market calm
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The market’s reaction shows that tensions in the Middle East remain a potent source of risk, with a renewed escalation capable of reverberating across oil, bonds, currencies and equities.
PHOTO: BLOOMBERG
- US 30-year Treasury yields hit a near 20-year high as Middle East tensions raise inflation fears and pressure stocks globally.
- Bond markets worldwide, including Japan and the euro zone, saw yields rise, while global stock indexes declined amid cautious investor sentiment.
- Investors await Fed meeting minutes and the Jackson Hole symposium for guidance, as escalating conflict could force a mid-cycle policy adjustment, says strategist George Bory.
AI generated
SINGAPORE – A sell-off in US government bonds picked up pace on Aug 18, sending the 30-year Treasury yield to a near two-decade high as fears of an escalation in the Middle East war fuelled inflation worries and pressured stocks.
The market’s reaction shows that tensions in the Middle East remain a potent source of risk, with a renewed escalation capable of reverberating across oil, bonds, currencies and equities.
It has also shattered the calm after a recent run of soft data in the US eased jitters about rate hikes by the Federal Reserve.
Traders see a 34.6 per cent chance of a hike at the Fed’s September meeting, lower than 48.4 per cent a week ago, according to the CME FedWatch tool.
But “if things unravel and the conflict escalates, a mid-cycle adjustment would be necessary”, said George Bory, chief investment strategist for fixed income at Allspring Global Investments.
The yield on the US 30-year Treasury bond rose 1.42 basis points to 5.32 per cent, its highest in almost 20 years. Its 10-year counterpart traded up 0.99 basis points at 4.73 per cent.
The pressure also spread to other major government bond markets. Yields on Japan’s 10-year government bond were on the brink of hitting 3 per cent for the first time since the mid-1990s, while euro zone bond yields were hovering at multi-year highs.
Markets turn cautious
Europe’s STOXX 600 fell 0.52 per cent to 653.01. On Wall Street, futures tracking the S&P 500 and the Nasdaq 100 slipped 0.5 per cent and 1.22 per cent, respectively. MSCI’s gauge of stocks across the globe dipped 0.26 per cent to 1,153.64.
High bond yields can weigh on equities by making stocks less attractive and raising borrowing costs for capital-intensive companies investing heavily in AI infrastructure.
The CBOE Volatility Index, Wall Street’s fear gauge, hit its highest in more than a week.
“The unresolved stand-off argues for maintaining hedges against renewed oil and inflation volatility,” strategists at Gramercy Funds Management wrote.
Investors are also awaiting minutes of the Fed’s most recent policy meeting, scheduled to be released on Aug 19. The central bank’s Jackson Hole symposium next week will also be scrutinised for clues on policymakers’ interpretation of the latest economic data.
“Given the reduced information content of the FOMC’s policy statement and Fed chair (Kevin) Warsh’s press conferences, the minutes from the FOMC meetings arguably have become more important in conveying the balance of views among policymakers,” said Jonas Goltermann, chief markets economist at Capital Economics, referring to the Federal Open Market Committee, which is the Fed’s interest rate-setting body. Reuters
