Oil has gone from simmering to boiling in a single morning. Brent crude is up about 5% to just over $105 a barrel after fresh Houthi attacks on Saudi Arabia and another tanker strike in the Gulf, and the bond market has taken the hint. US Treasury yields are pushing back towards 24-year highs and Wall Street futures are sliding into Thursday’s open.
Yesterday the worry was that oil and borrowing costs had come back. Today the worry is that they are feeding each other. Dearer energy means stickier inflation, stickier inflation means a Fed that keeps hiking, and that is exactly what a bond market already short of buyers does not want to hear on the day of a 30-year auction.
The Situation Right Now
S&P 500 futures are down around 0.6%, Nasdaq 100 futures roughly 0.8% and Dow futures close to 1%, according to CNBC data shortly before midday UK time. That follows a soft Wednesday, when the S&P 500 slipped 0.2% from its record high to finish at 7,801.77, so the index is starting the day right on the 7,800 mark it only cleared for the first time this week.
Fear is creeping up rather than flooding in. The VIX, Wall Street’s main gauge of expected volatility, is up almost 6% to about 16, which is jumpier than earlier in the week but a long way from panic.
What Changed Since This Morning?
This morning’s brief was about AI: Samsung’s record profit on one side and a wave of AI-related borrowing on the other. That story has not gone away, but oil has elbowed it off the front page. At breakfast Brent was trading around $102.50 and US futures were close to flat. Since then Brent has climbed almost another $3 and futures have turned clearly lower.
Three things did it. The Houthis’ latest attacks on Saudi airports, including King Khalid International in Riyadh, have killed and wounded civilians and deepened a conflict that threatens shipping through the Bab el-Mandeb strait at the mouth of the Red Sea. A tanker was hit by multiple projectiles off the north coast of Qatar on Wednesday evening, according to the UK Maritime Trade Operations agency, with attacks on Gulf shipping at their highest of the war. And Axios reports that the US military has been told to be ready for possible strikes on Iran while President Trump weighs the timing. Add Hurricane Isaias forcing oil producers in the US Gulf of Mexico to shut in output, and you have a supply scare coming from every direction at once.
Europe has felt it. The Stoxx 600 is down about 1.1% and Germany’s DAX roughly 1.2%, pushing European shares to four-month lows, while the FTSE 100 is off around 0.6%, cushioned a little by its big oil companies.
The Biggest US Market Story
The story that matters for Wall Street is not oil on its own. It is what oil does to the bond market. The 10-year Treasury yield is up about eight basis points to roughly 5.35%, a whisker below Wednesday’s peak, which was its highest level since 2002. The 30-year yield is around 5.73%, close to a 24-year high.
That matters because the Federal Reserve is already in hiking mode. Wednesday’s minutes showed most officials expect another rate rise by the end of the year, and this morning Fed Governor Christopher Waller said more hikes are needed, although they do not have to come at back-to-back meetings. Higher oil makes it harder for the Fed to sound any softer than that.
The next test arrives at 18:00 UK time, when the US Treasury sells $22 billion of 30-year bonds. Wednesday’s 10-year sale went better than feared, with the strongest demand relative to the amount on offer since 2016, and that briefly calmed nerves. Another solid result tonight would tell us buyers are still willing to step in at these yields. A weak one, with oil at $105, could make the long end of the bond market the main event for the rest of the week.
Stocks Moving Before The Bell
PepsiCo is the big name reporting before the open. Its third-quarter earnings and revenue beat analysts’ forecasts thanks to its international business, but it cut its full-year profit outlook and said it would make further cost cuts, blaming sluggish demand in North America and rising input costs. The shares were up about 1% in early premarket trading, which suggests investors had feared worse. It is also a neat summary of the consumer squeeze: people paying more for fuel are buying fewer crisps and fizzy drinks.
Chipmakers are under pressure despite good news. Taiwan Semiconductor reported a 54.6% jump in September revenue from a year earlier, and Samsung’s preliminary figures pointed to a record quarterly profit of about $80 billion, yet TSMC and Micron were both lower in early premarket trading. When bond yields rise this quickly, investors tend to take money off the most expensive growth stocks first, however strong the numbers.
Energy shares are the natural winners on a day like this, while airlines, cruise lines and other heavy fuel users are the obvious losers. Smaller companies are also struggling, with Russell 2000 futures down around 0.9% earlier this morning, because they tend to rely more on borrowing.
FX and the Dollar
The dollar is a little firmer, with the dollar index up about 0.1% to 102.4, close to an 18-month high. Higher US yields and a hawkish Fed give it support, and an oil shock tends to hurt energy importers such as the eurozone and Japan more than the US.
The euro is just under $1.12 and sterling is around $1.32, both slightly weaker. Dollar-yen is about 158.2, close to the levels where Japanese officials have warned they could step in to support their currency.
Bonds
The selling is global. The UK 10-year gilt yield is up about seven basis points to around 5.52%, with the 30-year gilt above 6%. French 10-year yields have risen roughly nine basis points to about 4.96%, keeping the pressure on Paris after this week’s sell-off, and Italy and Germany are also higher. The Financial Times reports that the Iran war has blown a hole of nearly £12 billion in Britain’s public finances, which will not make gilt investors any more relaxed ahead of the Budget.
In the US, the 2-year yield is around 4.82%, up about five basis points, as traders price a Fed that keeps going. The long end is moving more, which tells you this is as much about inflation and debt supply as it is about the next rate decision.
Commodities
Brent is around $105.20, up about 5% on the day, and US benchmark WTI is around $92.70, also up about 5%, according to CNBC. Both are trading near the top of their ranges for the session. US natural gas is up about 2%.
Gold is roughly flat at about $4,135 an ounce, bouncing off a two-month low earlier in the session. In a normal geopolitical scare gold would be flying, but higher yields and a firmer dollar are holding it back, because gold pays no interest. Silver is down around 2.5% and copper is slightly lower, a sign that metals traders are worried about growth as well as inflation.
Today’s Remaining Catalysts
Bank of England Governor Andrew Bailey speaks in Istanbul at 13:15 UK time, after the Bank’s Megan Greene warned this morning that it would be dangerous to rely on high bond yields to do the job of controlling inflation. Weekly US jobless claims follow at 13:30, with forecasts around 200,000. The labour market has been tight, and another low number would add to the case for more Fed hikes.
The Bank of England’s Clare Lombardelli speaks at 14:00, US wholesale inventories land at 15:00 and natural gas storage figures at 15:30. The big one is the 30-year Treasury auction at 18:00, with St Louis Fed President Alberto Musalem speaking at 18:40. Hurricane Isaias and any news on possible US strikes on Iran will be watched all day.
Levels Traders Are Watching
On the S&P 500, 7,800 is the obvious line, as the area where the index closed on Wednesday and where it broke through to records this week. For the 10-year Treasury yield, Wednesday’s high of about 5.36% is the level that matters; a close above it would put yields at fresh highs going back to 2002. In oil, today’s high just above $105 on Brent is the near-term marker, with $100 the level the market would need to see again for this scare to look like it is fading. On the dollar, 102.5 on the dollar index and 158 to 160 on dollar-yen are worth keeping an eye on. These are reference points, not targets.
Where That Leaves Us Into The Bell
Our read is that the bias into the open is negative, and more so than yesterday. The evidence is straightforward: oil is up 5%, yields are back near their highs, futures are down across the board and Europe has fallen to four-month lows. Wall Street has spent the week trying to look past dearer energy and dearer money. Today it is being asked to look past both at once, with a Fed that is still hiking.
The opportunities are likely to sit with energy producers and with companies whose results show they can pass on higher costs, as PepsiCo is trying to. The risks are a weak 30-year auction, a hot jobless claims number or a further escalation in the Gulf, any of which could push yields through this week’s highs. What would change the view is a calmer oil market and a strong auction: Brent slipping back towards $100 and the 10-year yield falling back below 5.30% would suggest the market has absorbed the shock. A clean break above 5.36% would make for a much harder afternoon. The markets to watch are Brent, the 10-year and 30-year Treasury yields, Nasdaq 100 futures and the dollar.
For beginners, the lesson is that an oil shock rarely stays in the oil market. It travels through inflation expectations into bond yields, and from there into the price of shares, especially the expensive ones. That chain matters more than the price of a barrel on its own. This is an educational view of the market, not advice to buy or sell anything.
If you want to see how you would cope with a day like this, when one headline moves oil, bonds and shares all at once, the free Samuel & Co Trading trader assessment is a good place to test your approach.
