Stocks fall as yen firms, Gulf attacks send oil towards $100 a barrel

The yen traded around seven-month highs on Tuesday and stocks fell after a volley of attacks on energy facilities around the Gulf drove oil to near USD 100 a barrel, while copper prices hit record highs.

Brent crude futures LCOc1 hit their highest in six weeks, nearing USD 100 a barrel, after Yemen's Iranian-backed Houthis attacked energy facilities and cities in Saudi Arabia, highlighting the risk of the conflict spreading throughout the region and further complicating the supply of fuel to world markets.

The price of diesel has hit record highs and has almost doubled from where it was before the start of the conflict, as has gasoline, and even prices for physical crude for immediate delivery are well above futures prices, in a clear indication of the toll the conflict is taking on the global energy market.

A resurgence in inflation has knocked the equity market in the past few weeks, in large part because of the surge in bond yields to multi-year highs, which puts central banks under pressure to raise interest rates.

The European Central Bank is all but certain to raise euro zone rates by a quarter point on Thursday this week, while the chances of the Bank of Japan doing the same next week are intensifying, which has set the yen on course for its strongest rally in two years.

Equity markets in Europe slipped, leaving the STOXX 600 .STOXX down 0.2 per cent, while futures on the S&P 500 ESc1were off 0.4 per cent and those on the Nasdaq NQc1were down 0.1 per cent, suggesting smaller losses for tech stocks when Wall Street reopens later after a long weekend.

US inflation data on Friday could prove decisive in setting expectations for the outcome of the Federal Reserve's meeting next week. Right now, money markets show traders are attaching a roughly 58 per cent chance of a rate rise 0#USDIRPR.

Oil stole the spotlight on Tuesday, but the yen's surge may prove the bigger story for global markets. Because of its status as a low-yielding currency, traders have borrowed yen in earnest to fund purchases of higher-yielding assets across currencies, bonds and equities, a strategy known as the carry trade.

But with the BOJ preparing to raise rates, Japanese bond yields at or near record highs and capital beginning to flow home, that trade is starting to unwind. In 2024, the last time the yen appreciated this quickly and carry trades reversed, a surge in volatility battered global equities.

In the last week alone, the yen JPY= has gained nearly 4 per cent, its largest week-on-week increase since July 2024. On Tuesday, it was trading around 154.4, leaving the dollar roughly unchanged on the day.

"Despite short-term fundamentals suggesting the move is overdone, it remains risky to stand in its way, particularly given the scope for further carry trade unwinding," ING strategist Francesco Pesole said.

On the broader economic front, data showed Japanese real wages rose 2.4 per cent in July from a year earlier, the biggest increase since May 2021.

"With wage growth going from strength to strength, the case for the Bank of Japan to hasten the pace of tightening is becoming increasingly compelling," Capital Economics analysts wrote in a research report.

In commodities beyond oil, the price of copper CMCU3 hit a record high on Tuesday, as global supply tightened with the metal continuing to flow into the US ahead of possible tariffs.

Three-month copper on the London Metal Exchange was up 1.1 per cent at USD 14,673 a ton, having risen to as much as USD 14,694.

On the bond market, benchmark US 10-year Treasury notes US10YT=RR were yielding 4.8 per cent, up 2 basis points on the day and not far off their highest since November 2023.