Oil Rises on Saudi Attacks, 10-Year Treasury Yield Hits 5%

Summary

Oil prices climbed after attacks on Saudi Arabian energy infrastructure stoked fresh supply concerns, with Brent crude and US crude both pushing higher. The US 10-year Treasury yield touched 5% for the first time since October 2023, pressuring sentiment ahead of the Federal Reserve's two-day policy meeting starting Tuesday, where markets widely expect Chair Kevin Warsh to raise rates. Japan's 10-year government bond yield also rose ahead of the Bank of Japan's meeting, where a quarter-point hike is anticipated. AI-related US equities face potential headwinds from rising yields as industry leaders voice concern over AI regulation.

Equities

The FTSE 100 closed 0.4% higher at 10,697.57 points on Monday, supported by gains in healthcare, consumer staples and energy shares. The FTSE 250 fell 0.6% to 23,834.48, its lowest closing level in more than a month.

GSK jumped 4.7% on Monday after announcing positive results for two lung cancer drugs, Jideytro and Ris-Rez, helping the wider pharmaceuticals sector rise 3.8%. Personal care, drug and grocery stocks gained 2.8%, while the beverages sector climbed 2.6%.

Shell and BP both rose about 1% on Monday as oil prices increased by roughly 3% following fresh strikes on Saudi Arabian infrastructure and Gulf shipping. Banks fell 1.4% and housebuilders dropped 2.2% as British government bond yields reached fresh multi-year highs.

GlobalData was the sharpest individual fall among the UK shares highlighted, sliding nearly 19% on Monday. The data analytics and consulting company dropped to the bottom of the FTSE 250 after its annual revenue growth forecast disappointed investors.

In the US, the S&P 500 closed 0.48% lower at 7,619.94 points on Monday. The Nasdaq fell 0.56% to 26,186.41, while the Dow Jones declined 0.29% to 52,421.17 as semiconductor shares came under heavy selling pressure.

Nvidia fell 3.4% on Monday, Micron Technology lost more than 5%, and Broadcom and Advanced Micro Devices each dropped more than 4%. The PHLX semiconductor index sank 5.9% after executives at leading AI companies called for slower development of the technology because of safety concerns.

Bank of America dropped 5.1% on Monday after chief executive Brian Moynihan said third-quarter investment banking fees were expected to fall by at least 10%. In contrast, software shares strengthened, with ServiceNow, Adobe and Workday rising between 4% and 7.4% during the session.

Forex & Commodities

The US dollar strengthened towards a two-week high early on Tuesday as US Treasury yields climbed sharply. The dollar index rose to 99.63, while sterling weakened to $1.349 and the euro slipped to $1.154. The yen fell to 154.9 per dollar, while the Australian dollar declined to $0.7120 and the New Zealand dollar dropped to $0.5757, its lowest level in two months.

Attention is firmly on the Federal Reserve, which is expected to raise interest rates on Wednesday. Markets were pricing in around a 93% probability of an increase, with policymakers expected to lift the benchmark rate by 25 basis points to 3.75%-4.00%. Expectations strengthened after recent US employment and inflation data came in firmer than anticipated.

The Bank of Japan is also widely expected to raise interest rates on Friday. Meanwhile, Chinese data released on Tuesday showed industrial activity strengthened in August, although consumption remained subdued.

Gold was steady at $4,302 an ounce early on Tuesday after touching its lowest level since 7 August during Monday’s session. Investors are awaiting the Fed decision and, in particular, guidance on whether Wednesday’s expected increase could be followed by further tightening.

Oil prices rose further early on Tuesday as supply concerns intensified following attacks on Saudi Arabian energy infrastructure. Brent crude climbed 1.3% to $107.1 a barrel, while US West Texas Intermediate gained 1.51% to $102.9.

Saudi Arabia’s East-West pipeline remained offline after attacks on Friday, limiting its ability to bypass the Strait of Hormuz. Traffic through Hormuz fell below 10 commodity-vessel transits a day over the weekend, while fresh Houthi attacks on Saudi Arabia and postponed Gulf-Iran talks added to concerns about further disruption to oil supplies.