Brent crude rose as much as 3% to $107.16 a barrel on Monday, taking its September gain to almost 20%, as uncertainty over a possible US-Iran agreement kept investors concerned about energy supply disruptions. Oil prices are now nearly 50% above levels recorded before the conflict began in late February, according to Reuters.
The energy shock is feeding directly into interest-rate expectations. Markets were pricing a 68% probability of another Federal Reserve rate increase in October, while roughly 90 basis points of tightening was being priced through the end of next year. The Reserve Bank of Australia was also expected to raise rates at its next meeting as policymakers respond to renewed inflation pressures.
Bond markets have reflected the changing outlook. The yield on the US 30-year Treasury reached 5.517%, close to its highest level since 2004, after rising 27 basis points during September. Two-year Treasury yields have climbed 55 basis points this month, their largest monthly increase since February 2023, as investors reassess the prospect of prolonged restrictive monetary policy.
Equity markets have remained relatively resilient despite the pressure on bonds. The MSCI All-World index was down 0.1% on Monday, while European equities gained as investors favoured defensive sectors and energy companies.
The dollar has also benefited from changing rate expectations and stronger US economic data, with its index reaching a two-month high of 101.39. Gold, meanwhile, fell sharply as higher yields increased the opportunity cost of holding the non-yielding asset.
For companies, the combination of higher energy and financing costs could complicate investment decisions, particularly for capital-intensive industries. Investors are therefore likely to focus increasingly on balance-sheet strength, cash generation and pricing power.
As markets enter a week filled with US inflation, employment, manufacturing and economic-growth data, the interaction between energy prices, bond yields and monetary policy is expected to remain central to global asset allocation.
