James Brodie
Head of Learning & Development, Flux
Commodities Jump, OIS Prices Likely Hikes in September, Precious Metals Fall
Bond vigilantes return as yields hit multi-decade highs; Fed hike odds surge to 70%; Brent breaks out after US-Iran strikes.
Bonds vigilantes are back as commodities jump as Middle East crisis intensifies.
Bonds are breaking. Commodities are ripping. The Middle East crisis just lit the fuse on a fiscal reckoning G7 governments have been avoiding for years.
The bond market's message is simple - yields keep rising until something breaks. Either the equity market cracks, or central banks blink and QE comes back.
The evidence is stacking up fast:
- UK 30-year yields - highest since 1998 (Chart 1, Trading View)
- Germany 10-year - highest since 1998
- Japan 10-year - highest since 1996
- US 10-year - 19-month high
- US 2-year - broke out to a 2-year high
OIS pricing now shows a 70% probability the Fed hikes on September 16th - a stunning reversal from a market that spent most of this year pricing cuts.
This is what happens when inflation outruns political will. Governments printed, spent, and deferred the bill for years. The bond market is now the judge.
The fastest way to defuse this - de-escalate the Middle East conflict and force Treasury departments to actually confront fiscal deficits instead of leaning on central banks to paper over them. Neither looks likely near-term.
Bloomberg reports GCC members are redirecting more capital generation toward domestic priorities, a quiet but structural shift. For international markets, that means tighter external capital supply just as global financing demand rises. Less petrodollar recycling into Treasuries and credit is a multi-year rebalancing, not a one-quarter story.
Of course, as US mortgage rates near 7% the screws will continue to turn on the housing market. Following China, Canada (down -7% YoY), Germany (down -6.2% YoY) and now Australia cracking.
The US attacked Iran overnight. And the Iranians predictably countered with strikes on Jordan, Kuwait and Bahrain. With Brent breaking out of a consolidating triangle (Chart 2, Trading View)
Precious metals fell hard gold down -2.7%, and silver -3.7% as the dollar strengthened on rate hike expectations.
Meanwhile the S&P 500 sits on key support at $7,609, with MACD trending lower, a break here will see selling stops triggered. (Chart 3, Trading View)
Meanwhile refined products continue to surge with European diesel back near all time highs (Chart 4, Flux)
And Singapore Marine fuel crack continuing to surge to new highs. (Chart 5, Flux)
On a positive note AI stocks continue to beat. DELL delivered another huge beat and raise, reporting record quarterly revenue of $47.0B versus $44.9B expected, up 58% YoY.
Rates, capital and commodities are converging on the same problem: the price of scarcity is rising. Governments need more capital, traditional pools of external capital may be becoming less dependable, and physical constraints are reappearing across commodity markets.
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