Stocks Fall as Oil Rally Keeps Bonds Under Strain: Markets Wrap

(Bloomberg) — US stocks fell as elevated oil prices piled further pressure on Treasuries, pushing the 10-year yield to levels last seen 19 years ago and keeping risk appetite firmly in check.

S&P 500 futures slipped 0.3%. The yield on 10-year Treasuries rose two basis points to 5.01%, easing from an earlier 2007 high. Brent crude climbed toward $107 a barrel, extending gains for September to 18%. The dollar headed for a back-to-back advance. Bitcoin slipped as hopes faded for imminent progress on a US regulatory bill, sending crypto stocks lower in premarket trading.

Lofty bond yields are setting the tone for markets, placing surging energy costs and mounting debt firmly on traders’ radar. Enthusiasm for the AI trade, the major driver of equity gains this year, also remains tempered as debate rages over whether the technology may inflict catastrophic harm.

“Of course the bond selloff is weighing on tech and growth stocks,” said Louis Puga at Societe de Gestion Prevoir. “There are really two worlds at play here: on one side healthy corporate balance sheets and profits, and on the other side countries running big deficits and putting pressure on the bond market.”

The weakness in bonds raises the stakes ahead of the Federal Reserve’s interest-rate decision on Wednesday, for which money markets are pricing in more than a 90% chance of a hike. If officials hold off, or Chair Kevin Warsh signals a shallower-than-expected path of tightening, investors may demand even higher yields as protection against inflation.

“After years of inflation overshooting target, the Fed’s credibility is under scrutiny,” wrote Jenny Zeng at Allianz Global Investors. Warsh’s “recent comments leave little doubt that restoring price stability remains the priority. September is the meeting where that commitment is put to the test.”

Europe’s Stoxx 600 fell 0.2%. Deutsche Bank AG slipped more than 2%, echoing declines among US peers after Bank of America Corp. warned that trading revenue for the current quarter will be flat. Regional bonds were mixed.

“Different risk premiums are piling up on the bond market,” said Mabrouk Chetouane at Natixis Investment Managers. “With that backdrop, equity markets are no longer rising but stalling. For markets to bounce from here, we would need both some king of visibility from the Fed tomorrow and solid third-quarter earnings.”

In Japan, selling was concentrated in long-dated bonds as the government considered setting a mid-term defense spending target of 3.5% of GDP. MSCI Inc.’s equity benchmark for Asia declined for a fourth straight day, its longest losing streak since May, with about three out of every four stocks falling.

Gold slipped further below $4,300 an ounce as rising crude prices reinforced expectations the Federal Reserve may raise rates this week. Higher rates typically diminish the appeal of the non-yielding metal.

What Bloomberg’s Strategists Say…

“Treasury yields are closing in on an inflection point where, historically, stocks and bonds have mutually amplified portfolio risk. That points to a regime shift of higher bond and stock volatility and wider credit spreads.”

Some of the main moves in markets:

Stocks

The Stoxx Europe 600 fell 0.2% as of 11:48 a.m. London time S&P 500 futures fell 0.3% Nasdaq 100 futures fell 0.3% Futures on the Dow Jones Industrial Average fell 0.4% The MSCI Asia Pacific Index fell 1% The MSCI Emerging Markets Index fell 1% Currencies

The Bloomberg Dollar Spot Index rose 0.2% The euro fell 0.1% to $1.1537 The Japanese yen fell 0.3% to 154.82 per dollar The offshore yuan was little changed at 6.7134 per dollar The British pound fell 0.2% to $1.3476 Cryptocurrencies

Bitcoin fell 2.6% to $77,038.76 Ether fell 3.5% to $2,479.93 Bonds

The yield on 10-year Treasuries advanced two basis points to 5.01% Germany’s 10-year yield advanced one basis point to 3.53% Britain’s 10-year yield advanced one basis point to 5.38% Commodities

Brent crude rose 1% to $106.71 a barrel Spot gold fell 0.6% to $4,275.83 an ounce This story was produced with the assistance of Bloomberg Automation.

–With assistance from Neil Campling.

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