US-Iran escalation lifts oil and bond yields

Key developments

• Oil risk repriced: A fresh US-Iran escalation has pushed geopolitical risk back to the centre of markets. Brent rose 4.6% yesterday and added another 1% this morning to around $95.6/b after both sides launched strikes overnight. The US said it targeted Iranian air-defence, radar and mine-laying infrastructure after an alleged attempt to lay mines in the Strait of Hormuz. Any perceived threat to Gulf shipping lanes will keep an oil-risk premium in place.
• Bonds sell off again: Higher oil prices fed through quickly into rates markets. The US 10-year yield rose another 5bps to 4.8%, its highest since January 2025, while the 30-year climbed to 5.27%, sharpening concerns over long-end duration.
• Risk appetite weakens: Equities retreated as energy-driven inflation risk and higher yields weighed on sentiment. The Nasdaq fell 1.0%, the S&P 500 lost 0.7%, European markets also declined, and Asia opened weaker this morning.
• Dollar firms: Haven demand and higher US yields supported the dollar, which gained against the euro, sterling and yen. The move was modest, but consistent with the broader risk-off tone.
• RBNZ stays hawkish: The Reserve Bank of New Zealand raised rates by 25bps to 2.75%, as expected. Its warning on persistent price pressures underlines the renewed sensitivity of central banks to inflation risks.
• ECB hike priced in: Eurozone headline inflation rose to 3.3% in August, the fastest since September 2023. Core inflation eased slightly to 2.4%, but markets still see next week’s 25bps ECB hike as almost certain.

Today’s major data

• Canada rates; US jobs. The Bank of Canada is expected to hold rates at 17:45. The US ADP jobs report is due at 16:15, with payroll gains forecast at 47,000.