Global bonds, stocks, selloff pauses as oil retreats from multi-month high

Markets paused their recent sell-off on Friday as oil prices dropped slightly from a four-month peak, though inflation concerns persisted and suggested central banks might need to tighten policy. Brent crude LCOc1 briefly reached a four-month high of US$109.97 a barrel after a 6% increase the previous day, but then faced selling pressure and fell almost 2% to US$105.90.

Oil flows were restricted through the Strait of Hormuz due to the US-Iran conflict, with Iran-aligned Houthis taking control of Yemen's Mocha port, which threatens Saudi oil exports in the Red Sea. This development highlighted the risk of a prolonged war in markets that are now considering the possibility of protracted conflict and higher rates.

The 10-year Treasury yield remained flat at 4.946% despite the oil price dip, while the 30-year yield hit another 19-year high of 5.3836% before retracting to 5.359%. The 2-year yield peaked at 4.5961%, marking a 14-month high, as investors increased bets on the Federal Reserve raising interest rates in the current month to combat inflation, currently at a 67% probability.

The US bond market saw a sell-off on Thursday due to a Treasury buyback program that fell short of the anticipated US$6 billion. European bond yields rose as well, with Germany's 10-year Bund yielding a 1% increase and a 17% weekly rise, its largest weekly rise since March. The upcoming US consumer price data in August could determine if the Fed would raise rates, with forecasts centered on a 0.2% monthly rise in the core CPI measure, but risks lean towards a higher figure due to sticky PPI data.

Market analysts at JPMorgan expect eight out of nine developed-market central banks to raise interest rates by the end of the year, including the Fed, BOJ, European Central Bank, and Australia and New Zealand reserve banks. This tightening is expected to be shallow, but there is a growing likelihood of more action due to resilient growth, persistent core inflation, and commodity price pressures.