Markets & Commodities

Markets

The conflict reached investors through higher interest rates, in the US through real yields; at the month's end US yields alone kept rising, a move not shown to come from oil, and in the same days weaker US borrowers paid more

In September the conflict reached investors through interest rates, in the US through higher real interest rates rather than inflation compensation, while Europe paid mainly through energy. Three central banks raised rates within nine days. The ECB raised its deposit rate to 2.50% on 10 September, according to the ECB, and tied the decision to the conflict in the Middle East. The Federal Reserve raised its target range to 3.75–4.00% on 16 September, citing elevated inflation and solid activity, and Fed Chair Kevin Warsh named geopolitics as a third factor. The Bank of Japan followed on 18 September.

The US 10-year Treasury yield rose from 4.75% to 5.26%. Almost all of that rise was in the inflation-adjusted (real) yield, which reached 2.91%. The 10-year breakeven rate, which measures the inflation compensation investors demand and is not a forecast of inflation, ended at 2.36%, up only 5 bp.

Borrowing costs rose on both sides of the Atlantic. The euro-area two-year yield, the basis for new fixed-rate euro borrowing, rose 0.35 percentage point to 3.21% by 29 September, and the ten-year rose to 3.61%. Dollar borrowers faced a steeper rise, with the US two-year at 4.89%. Bond prices fell, more in dollars than in euros, and cash earns more. At the month's end the rise continued in the US only: from 25 to 29 September euro-area yields eased while US yields rose, and the gap between US and euro-area two-year yields widened to 168 bp. That this late rise came from oil is not established: over 18–29 September US yields rose while oil fell, and inflation compensation barely moved.

In the same days the US high-yield spread, the extra yield weaker companies pay over Treasuries, widened 40 bp to 308 bp, while investment-grade spreads barely moved.

The dollar rose against the euro and sterling alike. The dollar index rose 2.0% to 101.45 and the euro fell 2.1% to $1.1355. For a euro-based investor, the dollar's rise lifted the euro value of unhedged dollar assets and the euro cost of dollar-priced energy.

The S&P 500 ended the month slightly lower, at 7,651.54, while the Nasdaq 100 rose 3.2% to 30,408.50, so US gains were concentrated in large technology stocks. The Euro Stoxx 50 fell 2.4% to 6,269.02. Gold fell 6.6% to $4,186.70 and is down 3.6% this year, consistent with gold trading on rising US real yields rather than as protection against the conflict.

Commodities

Crude through Hormuz recovered, helped by US escorts and pipeline redirection; refined products and LNG stayed restricted, and Brent ended the month 14.4% higher

By the end of September crude oil moved through the Strait of Hormuz again, but the oil price did not fall with the recovery in crude volumes, and refined products and liquefied natural gas (LNG) stayed restricted.

Crude moving through Hormuz returned to its pre-conflict level in the week to 28 September, about 13.5 million barrels a day according to Kpler data reported by CNBC, while refined products ran at about a fifth of normal. CNBC reports that the recovery came as US military escorts boosted shipments and pipelines redirected flows. Oil supply through the strait therefore rests on a military arrangement rather than a settlement. It remains unclear how long that arrangement can hold: further attacks on tankers were reported, and Iran has threatened energy infrastructure across the region.

Brent, the global oil benchmark, rose from $90.49 on 31 August, crossed $100 on 9 September and peaked at $108.75 on 15 September. Brent ended the month at $103.53, 14.4% above its start, about 5% below that peak and 70.1% higher this year.

The routes around Hormuz did not reduce the Gulf's dependence on it. Drones struck Saudi Arabia's East-West pipeline to the Red Sea, and war-risk insurance for tankers at its Red Sea port of Yanbu reached about 3% of a vessel's value, against under 1% in early July, according to Reuters. Yanbu loadings had restarted at reduced rates by 29 September; Reuters reports that the pre-attack rate could take another month to restore.

European gas changed little over the month and is about two and a half times its level at the end of last year. QatarEnergy extended its LNG force majeure to Asia and Europe through the end of November. Gulf LNG is a small part of Europe's own supply, but its absence is likely to keep the global price Europe pays high, with European stores reported low before winter.

For businesses, gas, freight and insurance costs stayed high, and refined products such as diesel stayed restricted. Whether the share of Gulf crude sent by pipeline, about 40% against 17% before the conflict according to Kpler data reported by CNBC, stays higher after a reopening is not established.