Iran, Fed data and 5% yields: - what’s moving markets

Investors are currently cautious as they await key U.S. economic data and the Federal Reserve's Beige Book. U.S.-Iran strikes and a significant rise in global bond yields have dampened risk appetite. The S&P 500 Futures are flat at 7,637.5 points, Nasdaq 100 Futures are unchanged at 29,112 points, and Dow Jones Futures rose 0.17% at 52,914 points.

The cautious sentiment follows a weak start to September on Wall Street, where major indexes fell as much as 1%. Investors are grappling with expectations for higher interest rates and heightened concerns over Middle East tensions. The U.S. executed strikes on Iran's Islamic Revolutionary Guard Corps, the second such attack this week.

Iran claims its Strait of Hormuz remains closed, while the U.S. asserts it is still open. However, shipping data indicates traffic through the vital waterway is at a small fraction of pre-war levels. President Trump has threatened further strikes if Iran retaliates, including targeting Kharg Island, a key Iranian oil export terminal.

Any disruption to the Strait of Hormuz could lead to higher crude prices, exacerbating inflationary pressures and making it challenging for the Federal Reserve to keep interest rates stable. Investors will receive several economic updates on Wednesday, including ADP private payrolls, factory orders, and the Federal Reserve's Beige Book.

The ADP report will offer insights into the U.S. labor market, while the Beige Book will provide the Fed's assessment of economic activity, prices, and hiring across its 12 districts. The Bank of Canada will also announce its interest-rate decision, with expectations of a 2.25% rate. While the decision is unlikely to directly impact U.S. stocks, investors will be observing the tone of the statement for clues on how other central banks are managing persistent inflation and rising borrowing costs.

Higher bond yields, such as the U.S. 10-year Treasury yield nearing a 5% peak, create challenges for growth and technology stocks, whose valuations rely on future profit expectations. As bond yields climb, the present value of future profits decreases, potentially undermining high-priced stocks. Consequently, businesses, housing, and consumer spending may face increased costs, further complicating market dynamics.

The main question for markets is whether inflation remains elevated enough to maintain high interest rates or if economic and labor-market weakness will grant central banks the opportunity to ease policy.