High Oil and Rising Yields Test Risk Appetite
High oil prices and climbing bond yields are not the ideal recipe for risk assets to keep ascending. Brent crude is hovering around the $90 mark as the US and Iran show little sign of closing the gap on a deal. President Trump has stated that the United States has no scheduled talks with Iran, and while he maintains that Washington has control of the Strait of Hormuz, the transit numbers tell a more cautious story. Confidence in safe passage remains low, with shipping volumes still running well below normal levels. That persistent uncertainty continues to keep a geopolitical risk premium embedded in the oil price.
Elevated energy costs are one clear factor feeding the rise in global bond yields. Inflation expectations have pushed yields higher across the major markets, including the United States, Japan, Germany and France. Yet that is only part of the equation. The move higher in yields also reflects a market that is demanding a higher term premium to absorb not only the vast quantity of sovereign debt still being issued, but also the substantial borrowing linked to the AI capital expenditure build-out. Investors are insisting on greater compensation for holding longer-duration paper in an environment of heavy supply and lingering inflation risk.
The S&P 500 did manage to notch a fresh record high only last week, underlining the resilience risk assets have shown so far. However, the path higher looks considerably more challenging if both oil and bond yields continue to grind upward. Equity markets have demonstrated an ability to look through a certain level of geopolitical and energy-related noise, but the combination of $90 oil and multi-year highs in long-end yields is beginning to test that tolerance.
Gold remains caught between competing forces. The Dollar Index has held below the 100 level so far, supported by the run of softer US data over the past two weeks and the scaling back of near-term Federal Reserve rate-hike expectations. That relative Dollar weakness has provided some breathing room for the precious metal. At the same time, persistently high oil prices continue to act as a headwind by keeping inflation concerns alive and limiting the scope for a more dovish rates narrative. For gold to make a serious challenge on the $4,500 level in the near term, it will likely need the US Dollar to stay muted and oil prices to take a clear step lower. Without those conditions, further upside may prove harder to sustain. Technical levels to watch include support at $4,306 and $4,220, with resistance arriving at $4,464.
Looking ahead, the main item on the economic calendar is the release of the FOMC minutes from the Federal Reserve’s July meeting, due on Wednesday. Traders will, as always, scrutinise the document for any fresh clues about the Committee’s thinking on future policy. That said, the run of softer data released since the meeting, including weaker jobs figures, cooler CPI and PPI readings, and softer retail sales, has already shifted the market’s assessment of the September meeting. What had been viewed as a likely rate hike only a short time ago has moved firmly into the “unlikely” column. As a result, the minutes may carry less immediate market-moving weight than usual.
Beyond the Fed minutes, the economic calendar is relatively light this week. That absence of major data releases is likely to sharpen the focus on the two variables that have dominated recent price action: the direction of oil prices and the trajectory of global bond yields. Both remain the primary swing factors for risk assets in the near term. As long as oil stays elevated and long-end yields continue to push higher, equities will face an uphill battle to extend their recent gains, while gold will need a clearer improvement in the Dollar or energy backdrop to regain stronger momentum.
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