Economists and strategists warn that equity markets are teetering on the edge of a correction as the price of oil pushes back up to $US100 a barrel and bond yields trade near the highest levels since the global financial crisis amid renewed tensions in the Middle East.
The oil price hit $US97 a barrel on Monday after Iran targeted three oil tankers in the Strait of Hormuz – through which one-fifth of the world’s energy supply is usually shipped – as well as US-linked ships in retaliation for American attacks on its vessels over the weekend.
The S&P/ASX 200 Index initially plunged 9 per cent when the US and Israel first struck in Iran in February and oil rocketed above $US100 a barrel, but it has since reset its record high in early August and is down less than 3 per cent from the recent peak.
And despite Goldman Sachs on Monday warning that the oil price could surge to $US120 a barrel if the shipping attacks intensified, the ASX 200 traded sideways for much of the session, while the S&P 500 index has fallen just 0.5 per cent in the past month. This compares to a roughly 7 per cent sell-off in March.
“Markets have spent much of this conflict trying to decide whether each escalation represents a genuine macro shock or simply another geopolitical squall that fades before London lunch,” SPI Asset Management managing partner Stephen Innes said on Monday.
“Every fresh attack is another reminder that one of the world’s most important energy arteries is still operating under a geopolitical tourniquet.”
Adding to the market’s growing list of concerns is last week’s global bond market meltdown after the spike in the oil price sent borrowing costs to multi-decade highs. In Australia, the all important 10-year bond yields – which filter through the economy via mortgages and business loans – hit a 15-year high of 5.2 per cent, and held steady at 5.19 per cent on Monday.
“The rise in bond yields is the real story and investors seem to be taking it in their stride, for now,” said Barrenjoey chief economist Jo Masters.
“Perhaps that reflects the recent lived experience where economies and markets seem to recover from the wave of shocks. I worry, though, that the recovery from each shock leaves the global economy less efficient and more vulnerable.”
In Australia, bond traders are pricing in a roughly 73 per cent chance that the Reserve Bank of Australia will this month deliver its fourth interest rate increase for the year following unexpectedly robust growth and inflation data. That probability was less than 20 per cent two weeks ago.
Source: https://www.afr.com/markets/equity-markets/risk-of-a-correction-is-high-after-oil-surge-bonds-meltdown-20260907-p60uzu