US Market Wrap: Treasuries and stocks decline as oil rallies on intensifying US/Iran strikes

• SNAPSHOT: Equities down, Treasuries down, Crude up, Dollar up, Gold down
• REAR VIEW: US launches fresh strikes in Iran; Iranian sources say response to US strikes will be extensive; Trump said if Iran respond, they'll be hit much harder; US ISM Mfg. PMI falls more than expected; US JOLTS rise less than anticipated; Two oil supertankers were reportedly hit by projectiles in the Strait of Hormuz; Fed's Barr said if inflation doesn't moderate soon, will be time for an interest rate hike; USTR Greer stated Canada may face additional tariffs; Bessent told Japanese officials that rate hikes are needed.
• COMING UP: Data: Australian GDP (Q2), South Korean Inflation (Aug), US Factory Orders (Jul), ADP Employment Change (Aug), New Zealand Terms of Trade (Q2). Events: RBNZ Announcement, BoC Announcement, Fed Beige Book. Speakers: ECB's Nagel; BoJ’s Takata; RBNZ’s Bremen; BoC’s Macklem, Rogers. Supply: Australia. Earnings: Broadcom, Hewlett Packard Enterprise, Snowflake

Stocks closed lower as this week's theme continues to be dominated by higher yields, oil prices, and continuing hostilities in the Middle East. Today, Iran fired on tankers transiting the Strait of Hormuz, the US responded with fresh strikes on IRGC targets/radars near the Strait, and in turn, the Iranians fired back at the US. As such, oil prices settled USD 4+ higher per barrel, short-end and belly yields hit new YTD highs, the dollar was firmer, whilst gold's positive correlation with geopolitical risk in August has continued to unwind, now trading down to USD 4,335/oz from 4,458 seen at the start of the week. Trump didn't seem keen on a call with Fox News to pursue diplomacy, "I think an agreement with them isn't worth the paper it's written on. He warned, if Iran responds, they will be ‘totally wiped out as a country’.

Sectors were generally in the red. Consumer Discretionary was the worst performer as heavyweights Amazon and Tesla both traded lower. Industrials and Materials also faced losses; meanwhile, Energy outperformed on higher oil prices. Utilities also saw gains, helped by a moderate rebound in PG&E (PCG +6.0%) and Equinix (EIX +8.9%) after reports that the California Assembly will kill the wildfire liability plan that the California Legislature and Gov. Newsom agreed to days ago. Given the influence on recent geopolitical developments over price action across assets, US data took the backseat. ISM Mfg PMI fell short on the headline, with prices remaining elevated, whilst JOLTS increased less than expected. At the Fed, Governor Barr said if inflation doesn't moderate soon, it will be time for an interest rate hike.

ISM MANUFACTURING (AUG): ISM Manufacturing for August fell to 54.6 from 55.6, and below the forecasted 55.2. Looking at the sub-components, Employment declined to 51.2 (exp. 52.5, prev. 52.8), while Prices was unchanged M/M at 71.1, but above the expected 70.5. New orders tumbled to 53.7 (exp. 56.8, prev. 56.7). Supplier deliveries ticked up to 59.3 from 58.9, while Inventories edged down to 50.6 from 51.2. Backlog of orders fell, but remained above 50; export orders ticked up while imports declined. In the August report, 42% of the comments were positive, and 58% were negative, with pricing volatility mentioned in 57% of negative comments, the Iran war 30%, increasing lead times 46% and tariffs 29%. Overall, the past relationship between the Manufacturing PMI and the overall economy indicates that the headline corresponds to a 2.4% increase in real GDP on an annualised basis. ING writes that another firm ISM mfg. index boosts confidence in the durability of the recovery in the sector, fuelled by the ongoing surge in tech-related capex. However, ING adds, the economy continues to create limited numbers of jobs, with wage pressures remaining remarkably benign.

JOLTS (JUL): US JOLTS job openings rose to 7.271mln in July from 7.182mln, but below the expected 7.330mln. Quits rate ticked lower to 1.9% from 2.0% M/M, while vacancy rate was unchanged at 4.4%. Hiring rate fell to 3.2% in July from 3.4% in June, and declined in several industries, led by a larger 0.8% fall for professional and business services. Labour turnover is also softening in the AI-exposed information sector again, supporting Oxford Economics opinion that AI is so far having only a modest impact on the jobs market, in aggregate. Overall, OxEco writes that the JOLTS report reinforced the story of a no-hire, no-fire labour market, and the labour market conditions are balanced because weak hiring is being matched by fewer workers seeking jobs.

FED's BARR (voter): If inflation doesn't moderate soon, it will be time for an interest rate hike. He added that inflation remains too high, though he favours steady rates if confident inflation is moderating. However, Barr noted persistence of inflation above target creates risk. The Governor said that the labour market is stable with low unemployment, and that the economy is growing 'solidly', boosted by AI investment.

T-NOTE FUTURES (Z6) SETTLED 9 TICKS LOWER AT 107-20

US yields track oil prices higher as US-Iran strikes continue. At settlement, 2-year +4.6bps at 4.392%, 3-year +5.1bps at 4.458%, 5-year +4.9bps at 4.553%, 7-year +4.8bps at 4.665%, 10-year +4.0bps at 4.794%, 20-year +2.6bps at 5.270%, 30-year +1.7bps at 5.264%.

THE DAY: Treasuries were once again sold, with the yields on the short end and belly continuing to set new YTD highs. The move comes amid continued inflationary concerns due to higher oil prices amid firing in the Middle East. Today, Iran fired on tankers transiting the Strait of Hormuz, the US responded with fresh strikes on IRGC targets/radars near the Strait, and in turn, the Iranians fired back at the US. As it stands, the strikes are ongoing, with no signals from the US President of a preference for diplomacy: "I think an agreement with them isn't worth the paper it's written on," he said to Fox News. That said, Monday afternoon, Trump said the strikes would be limited, but today warned Iran will be ‘totally wiped out as a country’ if it retaliates and “if they do respond, they’ll be hit much harder”.

US data had resulted in a limited fixed-income reaction given the current geopolitical influence. ISM Manufacturing PMI fell short on the headline, weighed by declines in employment, new orders, inventories, and backlog of orders, with the prices component remaining sticky at elevated levels. At the same time, JOLTS fell short of forecasts, accompanied by a slight move lower in the quits rate and an unchanged vacancy rate.

Elsewhere, US Treasury Secretary Bessent said bond yields are showing that inflation expectations are flat to down. Meanwhile, we heard from Fed Governor Barr, who noted that if inflation doesn't moderate soon, it will be time for an interest rate hike; however, if confident inflation is moderating, he favours steady rates.

SUPPLY

• US sold 6-wk bills at high-rate 3.735%, B/C 2.85x; sold 1-yr bills at high-rate 3.980%, B/C 3.61x
• US to sell USD 72bln of 17-wk bills on September 2nd; to sell USD 85bln of 8-wk bills and USD 90bln of 4-wk bills on September 3rd; all to settle Sept. 8th

STIRS / OPERATIONS

• Fed Hike Pricing via CME FedWatch: Sept 17.1bps (prev. 16.5bps), Dec 39.4bps (prev. 37.4bps)
• EFFR at 3.63% (prev. 3.63%), volumes at USD 105bln (prev. USD 123bln) on August 31st
• SOFR at 3.68% (prev. 3.65%), volumes at USD 3.056tln (prev. USD 2.808tln) on August 31st
• NY Fed RRP op demand at 0.725bln (prev. 6.726bln) across 2 counterparties (prev. 4) on September 1st

WTI (V6) SETTLED USD 4.46 HIGHER AT USD 90.22/BBL; BRENT (X6) SETTLED USD 4.16 HIGHER AT USD 94.65/BBL

The crude complex rallied and settled at highs as US/Iran traded further strikes alongside punchy rhetoric. As such, benchmarks hit troughs in the European morning before moving higher throughout the US session, as sparked by numerous headline catalysts in the US afternoon. In the EU morning, oil saw upside amid reports that two oil supertankers were hit by projectiles in the Strait of Hormuz. Nonetheless, the upside began as the US attacked Iran, with CENTCOM and Trump confirming they did; some reports suggested that explosions were heard in Bandar Abbas, Qeshm Island, and Chabahar. Explosions were also heard at the gas plant complex in Aslawiya. Trump added that if Iran retaliates, they will be hit again at a much harder and higher level. Following the US strikes, some suggested Iran launched missiles, with other sources suggesting that they will respond to the attacks in many ways and will be multiple times the US attack. Latest reports noted that Iran launched its retaliatory attacks against US bases and interests. WTI hit a peak of USD 90.55/bbl from an earlier low of USD 86.13/bbl, while Brent moved up to USD 95.09/bbl from USD 90.70. Aside from focus on any response or further escalation, we also get the weekly private inventory metrics after-hours.

CLOSES: SPX -0.71% at 7,632, NDX -1.29% at 29,077, DJI -0.79% at 52,772, RUT -1.23% at 2,920

SECTORS: Consumer discretionary -1.89%, Industrials -1.39%, Materials -1.36%, Technology -1%, Financials -0.88%, Communication services -0.53%, Real estate flat, Consumer staples +0.23%, Health +0.67%, Utilities +0.85%, Energy +1.54%

EUROPEAN CLOSES: Euro Stoxx 50 -0.81% at 6,368, Dax 40 -1.14% at 25,958, FTSE 100 -0.32% at 10,789, CAC 40 -0.39% at 8,302, FTSE MIB -1.33% at 51,915, IBEX 35 -0.79% at 19,816, PSI +0.44% at 9,478, SMI +0.34% at 14,335, AEX -0.35% at 1,102

STOCK SPECIFICS:

• Micron's (MU) Taiwan unions threaten strike over bonus dispute.
• Nio (NIO) shallower loss per shr. than exp. while rev. missed.
• Fervo Energy (FRVO) secured its largest power agreement to supply nearly 400MW of electricity to Google.
• Medtronic (MDT) EPS & rev. topped w/ FY outlook better than exp.
• Novartis (NVS) positive trial data for its multiple sclerosis drug; remibrutinib “significantly” reduced relapse rates in MS patients relative to other treatments.
• Robinhood (HOOD) upgraded at MS.
• GoPro (GPRO) entered into a definitive agreement to merge with Starman Optical and deal value of USD 1.14/shr/USD 285mln.
• US President Trump pleased to announce that Pastor Darrell Scott will be serving my Administration and me as an Advisor for tobacco health issues on the ACD in the CDC; to focus on tobacco health issues and harm reduction; MO and PM saw some pressure.
• The California Assembly will kill the wildfire liability plan CAL eg & Gov. Newsom agreed to it days ago, according to Ashley Zavala, citing multiple sources; PCG and EIX gained on the news.

The Dollar Index saw gains on Tuesday as Middle East tensions once again escalated as the US confirmed it launched attacks inside Iran, with an Iranian military source saying they will respond to US attacks in multiple ways and will be multiple times their attacks. As such, following all the US/Iran updates, the dollar saw strength, as did oil, while Treasuries, spot gold, and US indices all sold off in typical risk-off trade. Overnight, desks will await any response and any retort from the US, given President Trump warned Iran will be ‘totally wiped out as a country’ if it retaliates, and “if they do respond, they’ll be hit much harder". Away from geopolitics, US data came in the form of ISM Mfg. PMI and JOLTS; the former slightly disappointed, although prices were underneath consensus, while JOLTS declined and was underneath Wall St. expected; the quits rate edged lower while the vacancy rate was unchanged M/M. Lastly, Fed Governor Barr remarked that if inflation doesn't moderate soon, it will be time for an interest rate hike.

G10 FX was lower against the Greenback and predominantly due to the aforementioned Dollar strength and the geopolitical turmoil, as opposed to any currency-specific newsflow. Despite saying that, the Yen weakened and was subject to headlines; overnight, US Treasury Secretary Bessent told Japanese officials that rate hikes are needed, according to NHK, and a Japanese MoF official expects the BoJ to act on the economy and not on US influence. Further reporting through the day said that BoJ Governor Ueda likely met Bessent on the sidelines of the G20 finance leaders' meeting on Sunday.

Elsewhere, currency-specific newsflow was sparse; no EUR move was seen on Final EZ Manufacturing PMIs, which were mostly revised lower, while headline inflation ticked higher to 3.3% as expected. On the central bank footing, ECB's Simkus said a hike in September is "not going to be enough", and a 50bps hike is not needed, while BoE's Mann stated it is better for interest rates to be a little bit too high and then of course, correct if necessary.

Overnight is the RBNZ meeting, whereby the central bank is expected to hike rates 25bps to 2.75%; the hike is very widely expected, and markets are fully pricing in the move, so the impact on the Kiwi will be highly dependent on whether the statement will still include firmly hawkish guidance, and on updated rate/economic projections.