Oil prices rise over USD 1 on mounting concerns over Middle East supply

TOKYO – Oil prices rose in early Asian trade on Tuesday, reversing the previous session’s loss as concerns that an escalating Middle East conflict could hit supplies outweighed fears of a possible US recession that could hurt demand in the world’s top oil consumer.

Several US personnel were injured in an attack against a military base in Iraq on Monday, three US officials told Reuters, as concerns in the region mounted following last week’s killing of senior members of militant groups Hamas and Hezbollah.

US West Texas Intermediate crude futures climbed USD 1.18, or 1.6%, to USD 74.12 per barrel by 1022 GMT, or in early trade in Asia.

On Monday, both WTI and Brent benchmarks fell by 0.7-0.8% as a selloff continued on global stock markets. Oil’s slide was limited by worries Iran would retaliate for the assassination of a Hamas leader in Tehran may lead to a wider war in the Middle East.

On Monday, a senior ally of President Vladimir Putin arrived in Tehran for talks with Iranian leaders including the president and top security officials as the Islamic Republic weighs its response to the killing of a Hamas leader.

Israeli Prime Minister Benjamin Netanyahu faces anger in Israel and abroad over his handling of Gaza ceasefire talks which have faltered, three Israeli officials said, as fears mounted that the crisis could spiral into war with Iran.

(Reporting by Yuka Obayashi; Editing by David Gregorio)

Dollar down as US rate cut bets rise, yen surges

NEW YORK – A surge in the yen to a seven-month high led a broad dollar fall, as a slew of economic data last week raised the prospect of a US economic downturn and bigger interest rate cuts from the Federal Reserve.

The dollar index, which tracks the US currency against a basket of six others, was down 0.46% to 102.68, after sinking as low as 102.15, its weakest since January 12.

Against the yen, the dollar fell 2.04% to 143.5, close to the weakest level for the year. The euro was up 0.37% to USD 1.095, after rising as high as USD 1.1009, its strongest since Jan. 2.

Weaker-than-expected US jobs data, along with disappointing earnings reports from large technology firms and heightened concerns over the Chinese economy, have sparked a global sell-off in stocks, oil and high-yielding currencies in the past week as investors sought the safety of cash.

The selling continued on Monday, with US Treasury yields falling further, stock indexes in the red, bitcoin dumped and the dollar losing ground.

“When you zoom out and look at the big picture, whenever there’s a crisis in markets, it’s clear that there’s far too much leverage and everyone is crowded into the same trades,” said Adam Button, chief currency analyst at ForexLive.

Treasury yields have been falling sharply since last week, when the Fed kept the policy rate in its current 5.25% to 5.50% range while Fed Chair Jerome Powell opened the possibility of a rate cut in September.

But by Friday, after data showed the unemployment rate had jumped, expectations for rate cuts rose.

“Friday’s (non-farm payrolls) report was a bit of a shock to the global system, and markets are very worried that the US may no longer be a viable driver of global growth,” said Helen Given, FX trader at Monex USA in Washington.

The Japanese yen’s surge comes as traders aggressively unwound carry trades. So-called carry trades, where investors borrow in money from economies with low interest rates such as Japan or Switzerland to fund investments in higher-yielding assets elsewhere, have been popular in recent years.

“Whenever there’s trouble, the rush to the exit is so dramatic that it creates these incredible waves in markets that swamp related markets,” said Button. “You never know how much money is piled into the carry trade until it unwinds.”

On Monday, Fed fund futures reflected traders pricing a near 100% chance of a 50 basis point cut at the central bank’s September meeting, according to CME FedWatch.

“The Japanese equity sell-off during Asian trading spooked markets in a big way, coupled with the yen’s resurgence, and we may be seeing the so-called ‘panic spiral’ that many have been concerned about,” Monex’s Given said.

Meanwhile, the Swiss franc, another popular carry trade funding currency, was 0.83% higher at 0.85 to the dollar. The franc, a traditional safe haven, was also trading near a seven-month high.

The dollar found some relief against the British pound as the marked deterioration in global investor risk sentiment sapped demand for riskier currencies.

The depreciation of Mexico’s peso extended into its third day on Monday, and the US dollar rose 1.64% to 19.48 pesos, on investor risk aversion.

In cryptocurrencies, bitcoin and ether plunged on Monday to multi-month lows as investors a rushed out of risky assets. Bitcoin was down 15.11% to USD 53,094, heading for its largest one-day fall since November 2022. Ether was last down 21.25% at USD 2,374.70.

(Reporting by Hannah Lang and Saqib Iqbal Ahmed in New york; Additional reporting by Vidya Ranganathan in Singapore, Sruthi Shankar, and Sarupya Ganguly in Bengaluru; Editing by Christopher Cushing, Ros Russell, Christina Fincher, Nick Zieminski, and Jonathan Oatis)

Key US bond yield curve turns positive on recession fears

A closely watched part of the US Treasury yield curve, a key bond market indicator of an upcoming recession, turned positive for the first time in two years, as concerns grew that the US economy is heading into a downturn.

An inversion in the yield curve comparing two- and 10-year Treasury yields typically indicates that a recession is likely in the next one to two years, though this inversion has lasted longer than in previous episodes.

The curve then usually turns positive before a downturn begins, with short-term yields dropping faster than longer ones on expectations the Federal Reserve will cut interest rates to support a weakening economy.

“An inversion is the long-leading indicator of recession, and a disinversion is the signal that maybe you’re entering or you’re near an actual recession,” said Matthew Nest, global head of active fixed income at State Street Global Advisors.

In the past four recessions – 2020, 2007-2009, 2001, and 1990-1991 – the 2/10 curve had turned positive by the time a recession occurred, according to a Deutsche Bank analysis published last year. The interval between a disinversion and the beginning of a recession varied, ranging roughly between two and six months in those four instances.

The 2/10 curve had been continuously inverted since early July 2022, exceeding a previous inversion record from 1978. Some in the market had questioned its accuracy as a recession indicator this time around because of optimism that the US could escape prolonged economic pain.

But weak economic data last week re-ignited recession fears and a prompted a sharp repricing in US interest rate cut expectations, with investors now expecting the Fed to lower rates by 120 basis points this year – about double the easing that was priced in last week.

“The potential for immaculate disinflation was the rebuttal to the inversion story, but we’ve always been leaning toward (the idea) it may just be delayed rather than a false signal this time around,” said Nest.

Two-year Treasury yields, sensitive to expected changes in monetary policy, have dropped over 50 basis points over the past week to 3.84%. Benchmark 10-year yields have decreased by about 40 basis points over the past week and were last at 3.76%.

The gap between two- and 10-year Treasury notes US2US10=TWEB hit 0.4 basis points in early trade, turning positive for the first time since July 2022. Later on Monday the curve inverted again, with two-year yields above long-term ones by about 8 basis points.

The disinversion is a signal that the market is “screaming that the Fed needs to cut rates,” said Matthew Miskin, John Hancock Investment Management’s co-chief investment strategist.

“Whether or not that’s justified … we’ll just have to see how lasting this risk-off environment is.”

(Reporting by Karen Brettell and Davide Barbuscia; Editing by Mark Potter and Jonathan Oatis)

Investors’ black-tinted glasses obscure Fed’s role

LONDON – From Tokyo to Seoul, from London to Frankfurt, equities traders’ screens are spewing red on Monday. Japan’s tighter monetary policy and pricey artificial intelligence stocks are playing a part, but the markets’ biggest fear is that of a US recession. However, investors hoping that Federal Reserve Chair Jay Powell will help by rapidly slashing rates are likely to be disappointed.

Stock markets have been rudely awoken from dreams of an economic “soft landing”. Instead of an ideal situation in which inflation glides back to a manageable 2% while the US and global economies avoid contractions, major equities indexes are now signaling the prospect of a messier ending to a long boom.

On Monday, Japan’s Nikkei 225 index slumped nearly 13% in its biggest one-day percentage fall since October 1987. In Europe, the benchmark Stoxx 600 index has lost 6% in August’s three trading days, while the FTSE 100 index is down 4% in the same period. In the United States, the tech-heavy Nasdaq Composite index is already 10% below the peak touched on July 10. And futures markets suggest the rout may continue when US trading begins.

The decision by the Bank of Japan to raise rates, disappointing results by the likes of Microsoft, Alphabet, and Intel, coupled with their AI-inflated valuations, contributed to the gloomy mood. News at the weekend that legendary investor Warren Buffett had halved his stake in Apple didn’t help.

But the darkest threat is a US recession. That would be a shock. When Bank of America surveyed global fund managers in July, nearly 70% said they expected a soft landing. But there are some worrying signs that the economy is stuttering: unemployment rose to 4.3% in July — close to a three-year high. Hiring is slowing to levels that in the past have heralded recessions, according to the “Sahm rule”, a measure of how fast unemployment is rising developed by former Fed economist Claudia Sahm. Weak earnings from Oreo-maker Mondelez MDLZ.O and other consumer giants have compounded fears of a fragile US consumer.

Traders would like Powell to bail them out. Since Friday, they have ramped up bets that US rates will plunge from the current range of 5.25% to 5.50%. They now expect three consecutive cuts for a total of 125 basis points by December, derivatives prices collected by LSEG show.

Such a rapid series of cuts would be unheard of outside of a deep recession or financial crisis. Yet the US economy is still growing at an annual rate of 2.5%, according to the Atlanta Federal Reserve’s current estimate. While unemployment is ticking up, it is at an historically low level, and less than half the rate during the 2009 recession. Lastly, inflation remains above the Federal Reserve’s 2% target. The weakening backdrop may well prod Powell to start lowering rates. But he would be ill-served to heed the market’s strident call for emergency stimulus.

CONTEXT NEWS

Stock markets in Asia and Europe tumbled on Aug. 5, as fears of a US recession, high valuations of technology stocks, and high-profile share sales by Warren Buffett sent traders looking for cover.

The Swiss franc, US Treasuries, and German government bonds – assets that are considered safer than most – all rose, amid signs the rout will continue once US stock markets open for the week.

Japan’s benchmark Nikkei average closed 12.40% lower at 31,458.42, its largest one-day fall since October 1987, while the broader Topix lost 12.48% to 2,220.91.

European stocks opened 1.8% lower with France’s CAC 40 down 2.1%, Spain’s IBEX down 2.8%, and the UK’s FTSE 100 off 1.7% in morning trading.

(Editing by Neil Unmack, Oliver Taslic and Streisand Neto)

Magnificent Seven set to shed USD 800 billion in value

Apple and other heavyweight companies sold off on Monday as US recession fears and Berkshire Hathaway’s sale of half of its stake in the iPhone maker further deflated a months-long rally fueled by optimism about AI.

Apple, Tesla, Alphabet, and Amazon each dropped more than 4%, while Nvidia tumbled 7%, and Microsoft, and Meta Platforms fell 3% as worries about a potential US recession compounded investor concerns about massive spending to build AI infrastructure.

Those seven corporations were on track to lose about USD 800 billion in stock market value for the session, according to LSEG data.

“Expectations have arguably become too high for the so-called Magnificent Seven group of companies. Their success has made them untouchable in the eyes of investors and when they fall short of greatness, out come the knives,” Dan Coatsworth, investment analyst at AJ Bell, said.

Chip stocks tumbled broadly, with PHLX semiconductor down 2.6%, bringing its loss in the past three sessions to 14%.

A third straight day of heavy selling across Wall Street followed a weak US payrolls report on Friday that pushed investors across the globe to safe assets and spurred bets that the Federal Reserve will have to move quickly to cut interest rates to avoid a recession.

Over the weekend, Warren Buffett’s Berkshire Hathaway said it had halved its stake in Apple – the conglomerate’s top holding – raising worries about the outlook for the tech industry.

Also hitting Nvidia, the Information and Financial Times reported on design flaws and production hiccups that could delay the launch of the chip designer’s new AI processor.

After driving gains on Wall Street for more than a year, big technology stocks have faced pressure in recent weeks over worries that building AI-optimized data centers is turning out to be more costly than expected, and that the payoff from that spending could take longer to realize.

Shares of Amazon, Microsoft and Alphabet – the three biggest providers of cloud-computing services – have fallen recently after their earnings reports sowed doubts that their margins could take a hit from the billions of dollars being spent on AI.

Despite the sell-off, Nvidia shares have nearly doubled in value this year. Following recent selling, Microsoft and Amazon remain up 5% in 2024, and Apple is up 7%. Tesla has dropped 21% year to date.

Some analysts said Monday’s slide could provide investors an opportunity to buy Big Tech shares at more attractive valuations, pointing to the expected long-term returns from their AI investments, as well as their strong market positions.

“Our playbook for 24 years covering tech stocks on the Street is we handhold investors through the panic and irrational global sell-offs to own the best tech names and winners driving the growth themes,” said long-time tech bull Dan Ives, who is an analyst at Wedbush Securities.

(Reporting by Aditya Soni in Bengaluru; Additional reporting by Noel Randewich in Oakland, California; Editing by Arun Koyyur and Aurora Ellis)

Oil hovers at 8-month lows as US recession fears offset Mideast tensions

SINGAPORE – Oil prices hovered at eight-month lows on Monday as fears of a recession in the United States, the world’s top oil consumer, offset concerns that escalating tensions in the Middle East may affect supplies from the largest producing region.

Brent crude futures inched down 4 cents, or 0.1%, to USD 76.77 a barrel by 0035 GMT, while US West Texas Intermediate crude futures were at USD 73.39 a barrel, down 13 cents, or 0.2%.

Prices were supported by persistent fighting in Gaza with an Israeli airstrike hitting two schools and killing at least 30 people on Sunday, Palestinian officials said, the day after a round of talks in Cairo ended without result.

Israel and the United States are bracing for a serious escalation in the region after Iran and its allies Hamas and Hezbollah pledged to retaliate against Israel for the killings of Hamas’ leader Ismail Haniyeh and Fuad Shukr, a top military commander from Lebanese armed group Hezbollah last week.

“If this conflict intensifies, crude exports could be impacted,” ANZ analysts said in a note.

Despite worries about escalating tensions in the Middle East, Brent and WTI tumbled more than 3% to settle at their lowest since January on Friday in a volatile week. Last week, both contracts marked their fourth straight week of losses, their biggest losing streaks since November.

Oil prices were dragged down by US recession fears and after OPEC+, an alliance between the Organization of the Petroleum Exporting Countries and other producers such as Russia, stuck to its plan to phase out voluntary production cuts from October.

The market had been expecting OPEC+ to delay the phase-out of voluntary production cuts beyond the third quarter, ANZ analysts said.

A Reuters survey showed on Friday that OPEC oil output rose in July despite production cuts by the group.

In the US, the number of operating oil rigs was steady at 482 last week, Baker Hughes said in a weekly report.

Weak economic data across the globe weighed on oil prices, on concerns that a sluggish global economic recovery would dampen fuel consumption.

Data released last week showed that the US economy added fewer jobs than expected last month while factories across the US, China, and Europe grappled with tepid demand.

Slumping diesel consumption in China, the world’s biggest contributor to oil demand growth, is weighing on global oil prices.

(Reporting by Florence Tan; Editing by Sonali Paul)

Stocks shaken by US recession fears, bonds price for rate cuts

SYDNEY – Major share indices were deep in the red in Asia on Monday as fears the United States could be heading for recession triggered mass risk aversion and wagers interest rates will have to fall sharply, and quickly, to support growth.

Investors started where they finished on Friday by knocking Nasdaq futures down 1.28%, while S&P 500 futures dropped 0.79%. Nikkei futures were trading at 34,665, over a thousand points below the cash close of 35,909.

Treasury futures were off 5 ticks, but that followed a huge rally on Friday where yields dived 18 basis points to the lowest since November.

Two-year yields sank 50 basis points last week and could soon slide below 10-year yields, turning the curve positive in a way that has heralded recessions in the past.

The worryingly weak July payrolls report saw markets price in a near 70% chance the Federal Reserve will not only cut rates in September, but ease by a full 50 basis points. Futures imply 155 basis points of cuts this year, with a similar amount in 2025.

“We have increased our 12-month recession odds by 10pp to 25%,” said analysts at Goldman Sachs in a note, though they thought the danger was limited by the sheer scope the Fed had to ease policy.

Goldman now expects quarter-point cuts in September, November, and December.

“The premise of our forecast is that job growth will recover in August and the FOMC will judge 25bp cuts a sufficient response to any downside risks,” they added. “If we are wrong and the August employment report is as weak as the July report, then a 50bp cut would be likely in September.”

Investors will get a read on employment in the service sector from the ISM non-manufacturing survey due later Monday and analysts are hoping for a rebound to 51.0 after June’s unexpected slide to 48.8.

The huge drop in Treasury yields had also overshadowed the US dollar’s usual safe-haven appeal and dragged the currency don around 1% on Friday.

Early on Monday, the dollar was down another 0.2% on the Japanese yen at 146.19, while the euro was holding steady at USD 1.0907.

The Swiss franc was a major beneficiary of the rush from risk, with the dollar near six-month lows at 0.8586 francs.

“The shift in expected interest rate differentials against the US has outweighed the deterioration in risk sentiment,” said Jonas Goltermann, deputy chief markets economist at Capital Economics.

“If the recession narrative takes hold in earnest, we would expect that to change, and the dollar to rebound as safe-haven demand becomes the dominant driver in currency markets.”

Investors had also increased wagers other major central banks would follow the Fed’s lead and ease more aggressively, with the European Central Bank now seen cutting by 67 basis points by Christmas.

In commodity markets, gold was steady at USD 2,442 an ounce, supported by lower yields globally.

Oil prices bounced amid concerns about a widening conflict in the Middle East, though worries about demand had seen it sink to eight-month lows last week.

Brent gained 44 cents to USD 77.24 a barrel, while US crude rose 40 cents to USD 73.92 per barrel.

(Reporting by Wayne Cole; Editing by Stephen Coates)

US recession scare fuels searing rally in bonds, yield curve flip in view

NEW YORK – A sharp repricing in US interest rate cut expectations could give more fuel to a searing bond rally triggered by weakening economic data, as investors grapple with the possibility the Federal Reserve may need to loosen its tight grip on the economy much faster than anticipated to avoid a recession.

Earlier this week investors were assessing whether the US central bank may have been too late in shifting to a less restrictive posture when it held borrowing costs steady at its July rate-setting meeting. That changed to drastically late during the week, as manufacturing data on Thursday and weak employment data on Friday sparked recession fears and a sharp repricing of monetary policy for the rest of this year.

“The rising unemployment rate says the Fed has fallen behind the curve,” said Tony Farren, managing director at Mischler Financial Group.

Traders in futures contracts tied to the Fed’s overnight policy rate were betting on about 120 basis points in interest rate cuts for the rest of this year, nearly double what was priced in prior to the Fed’s meeting on Wednesday. Treasury yields, which move inversely to prices, dropped sharply with two-year yields hitting their lowest since March last year and benchmark 10-year yields at their lowest since December.

The 2/10 yield curve, which has been continuously inverted for more than two years, was at minus 9 basis points – the closest it has been to turning positive since the inversion started. In the last four recessions, that curve had turned positive a few months before the economy started contracting.

Data on Friday showed the unemployment rate rose to 4.3%, marking an unexpected deterioration in the labor market that had so far shown surprising resilience during the Fed’s aggressive rate-hike campaign. The two-tenths of a percentage point rise in the jobless rate triggered the so-called Sahm rule, a historically accurate early indicator of recession, according to analysts.

The rule, which aims to flag the onset of recession more quickly than the current process that formally dates business cycles, identifies signals related to the start of a recession when the three-month moving average of the national unemployment rate rises by 0.50 percentage point or more relative to its low during the previous 12 months. On Friday that indicator rose to 0.53 percentage points.

“This rule is empirical and it has literally never failed,” Alfonso Peccatiello, chief executive of global macro investment strategy firm The Macro Compass said in a note. “Of course ‘this time can be different’, but markets are now forced to ask the recession question louder.”

The slowdown in July employment followed data showing a surprise slump in US manufacturing last month, which had already pushed Treasury yields to multi-month lows on Thursday.

“Thursday was the first wake-up call about recession risk and today there’s another one as people start to believe in the data more,” said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management, who has been reducing equity exposure over the past few days.

“People are rushing into recession trades,” he said. “We went from ‘Goldilocks’ to recession in one week,” referring to the Goldilocks scenario of lower inflation and stable growth that has supported asset prices this year.

Others in the market struck a more cautious tone, with some analysts observing that the underlying labor data for July were not as weak as the headline numbers suggested.

US bond giant manager PIMCO said in a note the data strengthened expectations for a first rate cut in September and raised the possibility of a faster pace of rate cuts going forward, but the economy was still holding up.

“There were some caveats in the details, which continue to paint a picture of a slowing but not yet crashing economy,” said Tiffany Wilding, managing director and economist.

(Reporting by Davide Barbuscia; Editing by Megan Davies and Chizu Nomiyama)

Treasury yields slide amid US slowdown worries, global stock rout

TOKYO – US Treasury yields sank to fresh multi-month lows in Asia on Friday, amid building worries that the US economy is headed for a hard landing.

A steep sell-off in Asian stocks, following a tumble on Wall Street the day before, also stoked demand for Treasuries as a haven.

The 10-year Treasury yield sank as much as 3.5 basis points (bps) on Friday to reach 3.944% for the first time since early February, after tumbling as much as 14 bps overnight to breach the psychological 4% barrier.

The two-year yield dropped as much as 5.5 bps to 4.109%, the lowest since May of last year, extending Thursday’s more than 17 bps slide.

A surprise slump in US manufacturing data overnight ignited worries the Federal Reserve may be behind the curve, raising the risk of a sharp economic downturn and putting additional weight on a key monthly jobs report due later on Friday.

Trader bets for a super-sized 50-basis-point interest-rate cut at the Fed’s next policy meeting in September jumped to 27.5% from 11.8% a day earlier, according to the CME Group’s FedWatch tool.

At its policy meeting that ended on Wednesday, the Fed left rates unchanged, but Chair Jerome Powell pointed to September as a potential start to cuts.

“This pricing suggests the market is moving away from a soft-landing scenario to one where the Fed will need to take the fed funds rate below a neutral setting and to stimulate,” said Chris Weston, head of research at Pepperstone.

“Perhaps (there’s) even an element of front-loading upcoming rate cuts, which is a far more worrying sign.”

(Reporting by Kevin Buckland; Editing by Christopher Cushing)

Japan’s Nikkei drops 5% after Wall Street sell-off

TOKYO – Japan’s Nikkei share average tumbled 5% on Friday to hit a six-month low after Wall Street slumped overnight on U.S. economic worries, while uncertainties over the Japanese central bank’s tightening path also weighed on the market.

The Nikkei was down 4.7% at 36,333.21, as of 0128 GMT. Earlier in the day, it declined as much as 5% to hit its lowest since Feb. 7.

The broader Topix was down 5.5% at 2,554.85.

U.S. stocks kicked off August sharply lower after a round of economic data spurred concerns the economy may be slowing faster than anticipated while the Federal Reserve maintains a restrictive monetary policy.

“Momentum in the U.S. market turned negative overnight, with concerns about recession rising. That weighed on Japanese equities a lot today,” said Yugo Tsuboi, chief strategist at Daiwa Securities.

“In Japan, the market is uncertain about whether the BOJ will raise interest rates again this year and by how much,” said Tsuboi, adding that higher rates could strengthen the yen and that could hurt exporters.

Chip-making equipment maker Tokyo Electron tanked 12% to drag the Nikkei the most. Chip-testing equipment maker Advantest slipped 7%. Technology investor SoftBank Group lost 6.8%.

All the 33 industry sub-indexes on the Tokyo Stock Exchange fell, with financial sectors leading the losses. The brokerage sector lost 11% and the banking sector fell 8.4%.

The Nikkei Volatility index was near 28%, its highest since April 19.

(Reporting by Junko Fujita, additional reporting by Ankur Banerjee; Editing by Subhranshu Sahu)

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