A record-breaking run in stocks hit a wall as higher oil prices lifted bond yields, stoking concerns that potential inflationary pressures could trigger Federal Reserve rate hikes.
Those worries sent the S&P 500 down from an all-time high and halted the Nasdaq 100’s six-day gain. Brent crude hit $102 amid a pickup in Iranian attacks on vessels in the Strait of Hormuz. Treasury 10-year yields hovered near the highest since 2002 before a $39 billion sale of the bonds and minutes of the last Fed meeting. The dollar rose. Bitcoin sank.
Investors are demanding greater compensation to hold global bonds as concerns about persistent inflation, government spending and surging corporate borrowing to finance the artificial-intelligence buildout intensify.
That sense of unease is being compounded by France’s fiscal woes, which are threatening to drag the European Central Bank into the kind of face-off with markets it hasn’t seen since the euro area’s debt crisis more than a decade ago.
Meantime, minutes of the Fed’s September gathering could reveal that many policymakers were deeply worried about underlying price trends and expecting to lift rates at least one more time before the end of the year. Money markets see a roughly one-in-four chance of a Fed hike this month.
“Persistently high energy prices keep risks to inflation, policy rates, and benchmark bond yields skewed to the upside,” said Elias Haddad at Brown Brothers Harriman & Co.
“A Fed pause may not bring down long yields if term premiums remain elevated,” said Ulrike Hoffmann-Burchardi at UBS Chief Investment Office. “Fixing the curve’s long-term problem without fiscal tightening requires two things: productivity-led growth and periods of low real borrowing costs.”
She recommends positioning for this by staying invested in AI-driven productivity gainers, diversifying across equities and high-quality fixed income, with a preference for shorter- over longer-duration bonds.
Equity markets face a genuine rival in bonds for the first time in decades, Bank of America Corp.’s Savita Subramanian told Bloomberg Television. She also cautioned that elevated investor sentiment leaves stocks more exposed to disappointment than upside.
With the recent developments in the credit markets, it will be essential that we get another extremely strong earnings season, noted Matt Maley at Miller Tabak. Analysts expect a roughly 25% increase in third-quarter S&P 500 profits from a year earlier, according to data compiled by Bloomberg Intelligence.