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Ominous triple whammy hits globe overnight
A triple whammy has hit the global economy overnight amid a concerning series of threats that threaten to derail the whole thing.
A triple whammy has hit the global economy overnight amid a concerning series of threats that threaten to push up interest rates around the world and derail the AI revolution.
First is the price of oil which has rocketed above $109 a barrel, some $8 higher than yesterday as markets see the intractability of the US-Israel war with Iran.
The war took a new turn overnight as Houthi rebels seized Mocha, a strategic port in western Yemen, as fighting with Saudi-backed forces intensified.
Its capture gives the Iran-backed militia greater leverage over the Bab al-Mandab Strait, which connects the Red Sea with the Gulf of Aden. The waterway has become particularly important for oil exports since the war with Iran disrupted shipping through the Strait of Hormuz.
Meanwhile, Saudi Arabia says its crude oil production has fallen to its lowest level since 1990. The kingdom notified OPEC that its production declined by 1.9 million barrels per day, to a total of 6.2 million barrels per day.
Provisional tanker-tracking data also shows that Saudi crude exports plunged around 40 per cent in August, from 5.1 million to 3.1 million barrels per day.
The fear more widely is that higher oil prices will feed inflation around the globe and force nations to increase interest rates in response.
In the US, the market now sees a new high 71 per cent chance of the Fed hiking interest rates by October. There is also now a 62 per cent chance of a rate hike at next week’s meeting.
Here in Australia, financial markets price the chance of a Reserve Bank of Australia (RBA) rate hike at roughly 70 per cent for the upcoming September meeting.
The second is an explosion in US government debt yields, which have spiked to eye-watering multiyear highs last seen in 2007. A brutal market sell-off pushed 30-year Treasury yields above 5.3 per cent, triggering a high-stakes scramble among investors to lock in returns before borrowing costs rise further.
The sharp leap in global benchmark yields threatens to drain liquidity from financial markets and lock in elevated interest rates for years to come.
The third is the concerns over Donald Trump’s plan to give a $5000 “dividend” to all American adults if his party wins the upcoming midterms.
Economists say the move could stoke inflation, further straining household finances in the long run.
“It simply makes no economic sense,” Brian Bethune, an economics professor at Boston College, told CNBC.
With oil prices topping $100 per barrel amid the ongoing war, escalating trade tensions with Canada and other countries, supply-side issues are driving prices higher, Mr Bethune said.
“If you add spending to a supply problem, it will make that problem worse,” he said. “It’s like bailing the water out of the boat and drilling a hole in the bottom of the boat at the same time.”
There is recent precedent, he said: “We ran into this problem in Covid. We poured all kinds of spending out there … and we got an acceleration in inflation.”
One of the major concerns is that rampant inflation could derail one of the biggest technological revolutions in modern history, the AI boom which is relying on trillions of dollars of borrowed cash to grow.
If that money becomes more expensive to borrow, it could mean investors think twice about piling more money into the companies which make up 40 per cent of the S&P500 index and lead to a broader market sell-off.
‘I am the house now’: US dares the world
The ominous overnight developments came after one of America’s most powerful financial figures gave a chilling dare to the world and the ASX sunk to its worst day since March.
US Treasury secretary Scott Bessent warned traders that they can bet against his market interventions at their own peril.
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“I have asymmetric information,” Mr Bessent said in an event at Southern Methodist University in Texas. “I am the house now. You can bet against me if you want.”
His comments on Tuesday came after an unusual joint US-Japan intervention in the Japanese yen at the end of July.
Overnight and today, global markets took him up on his offer and sent a grim signal to the world amid spiralling government debts, rampant inflation, rising oil prices and fears of an AI bubble.
Here in Australia, the ASX is suffered its worst day in months as it slid 1.03 per cent.
The sell-off came as the US Treasury finally released details of the bond buyback it announced last month and as oil prices surged above an important psychological threshold.
The US government tried to calm down Wall Street by buying back its own debt, but the effort fell short, and combined with spiking oil prices, it means borrowing money is about to get more expensive for almost everyone.
But as the details of the government buy back were announced overnight, yields on long term US Treasury bonds surged as disappointed markets expected stronger action.
Government bond yields act as the baseline benchmark for almost every interest rate in the global financial system. When the government has to pay higher interest to borrow money, every bank and lender follows suit and raises their own rates.
Traders had spent weeks holding their breath, betting Mr Bessent would drop at least $10 billion onto the table to swallow up swelling government debt.
Instead, the US Treasury announced an underwhelming $6 billion figure.
The move was aimed at steadying the ship, but Wall Street responded with a brutal sell-off that sent yields on long-term Treasury bonds higher.
Yields on the 30 year bond — which hit a near 20 year peak of 5.33 per cent in August — stood at 5.29 per cent, up from 5.26 per cent a day earlier.
The jump in yields also came as Brent oil prices jumped above $100 a barrel for the first time since late July on escalations in the US-Iran war.
Higher borrowing costs are a drag on economic growth and can weigh on equity prices.
Bond market insiders had thought that the buy back could reach $10 billion or more instead of the normal $2 billion, based on Mr Bessent’s comments, said a column from financial commentator Stephen Innes.
The $6 billion figure was “near the lower end of the whisper range,” Mr Innes wrote in a Substack column.
“The Treasury market spent the morning waiting for Scott Bessent to reveal how much firepower he was prepared to put behind the expanded buy back program,” Mr Innes said.
“When the number finally arrived, it was larger than the original commitment but still too small to satisfy a market already choking on duration.”
Briefing.com analyst Patrick O’Hare said that disappointment with the size of the buy back could explain the jump in yields.
But another explanation is that “the market sees it more or less as a shell game,” Mr O’Hare said of the policy.
A shell game is a deception where someone rapidly shifts things around to create the illusion of progress or value, while actually hiding the truth or solving nothing.
Some big names in finance have criticised the buy back plan as a Band Aid for systemic challenges with the US fiscal situation, arguing in part that the US Treasury market is too big to influence with such a buy back plan.
Mr Bessent’s plan constitutes a “forced effort that’s too obvious,” Mr O’Hare said.
Controversial plan
Wednesday’s Treasury announcement followed a plan unveiled on August 19 to “at least double” government bond buy backs under a Treasury program meant to guarantee sufficient market liquidity after the yield on the 30 year bond jumped to a near two decade high.
On August 20, Mr Bessent told CNBC that the spike in yields was exacerbated by thin market trading in the sleepy summer period and “don’t reflect the underlying fundamentals”.
Analysts have seen the jump in yields as reflective of several dynamics, including high oil prices, a surge in costly artificial intelligence investment and a flood of US government issuance because of the deficit.
The plan has also sparked criticism from some leaders in finance, including Stanley Druckenmiller, a billionaire investor and mentor.
“Markets aggregate information no committee possesses, and prices are how that information reaches decision makers,” Mr Druckenmiller said in a Wall Street Journal op ed last month.
“Every basis point of artificial yield suppression is a subsidy to procrastination,” he said.
Traders also see tension between the Treasury buy back plan and Federal Reserve Chairman Kevin Warsh’s goal of addressing persistent inflation.
Futures markets have lifted the odds of a Fed interest rate hike in light of higher oil prices and increased yields.
The market in the next two days will also get data points on wholesale and consumer inflation.
Friday’s consumer price index data will “either exacerbate or temper” market concerns about a Fed interest rate hike, Mr O’Hare said.
Oil surges, trade war escalates
International oil benchmark Brent spiked above $100 a barrel Wednesday for the first time since late July following renewed US-Iran hostilities, stoking fears of price increases and interest rate hikes.
The jump in crude prices — with Brent up more than three per cent to $101.21 a barrel — dragged down stock markets as investors worried that major central banks will raise rates to keep a lid on inflation.
Across the Atlantic, Europe’s markets fell with Paris ending the day down nearly two per cent. European natural gas prices rose sharply to their highest level since early 2023, topping 80 euros per megawatt-hour, as nations strive to replenish stocks ahead of winter.
The $100-a-barrel mark for crude oil “is a psychological level that matters for markets” and raises “costs for businesses and consumers and ultimately could weigh on economic growth,” argued Kathleen Brooks, research director at the XTB trading group.
The main US oil contract, West Texas Intermediate, climbed to over $96 a barrel.
Mr O’Hare blamed “nettlesome retaliatory strikes between the US and Iran doing the damage.”
Average diesel prices in the United States reached a record $5.94 per gallon, heaping domestic pressure on President Donald Trump ahead of November’s midterm elections.
All eyes are on US inflation data due Friday that could cement expectations that the Federal Reserve will raise borrowing costs next week.
“The bump in oil prices naturally translates to a bump in concerns about inflation and a possible rate hike by the Fed,” Mr O’Hare said.
Inflation data that is in line with expectations, or higher than anticipated, would raise expectations of a hike, said Forex.comanalyst Fawad Razaqzada.
Before then, the European Central Bank is widely forecast to lift eurozone interest rates on Thursday.
Inflation concerns have been driving yields on government debt higher as investors demand greater returns.
Markets are also concerned about an escalating trade fight between Washington and Ottawa, with the Trump administration on Tuesday announcing an incoming import ban, including on alcoholic beverages.
Iran on Wednesday launched fresh attacks against US targets in the Middle East in retaliation for American strikes on Iranian oil tankers, dragging the foes deeper into war.
Tehran’s powerful Revolutionary Guards said they attacked 20 US vessels trying to pass through the strategic Strait of Hormuz, largely controlled by Iran since the war erupted.
