US-Iran Conflict Reignites: Oil Surge Pressures Global Bonds, Is the Stock Market Next?

Original title: "US-Iran Conflict Reignites! Oil Prices Push Global Bond Markets to the Brink, Is the Stock Market Next?"
Original source: Wall Street CN

Oil prices surged 4.5% in two days, bringing the year-to-date gain to 51%, triggering a synchronized sell-off in global bond markets—German, UK, and Japanese government bond yields hit multi-decade highs. Years of fiscal stimulus have created "dry tinder" that, combined with the Iran conflict, is spreading inflationary pressures well beyond the energy sector. With the September 11 CPI data and the Federal Reserve's policy meeting looming, analysts warn that if policy responses falter, the stock market could be the next to come under pressure. The oil price surge is pushing the already fragile global bond market to a tipping point.

After the US-Iran conflict reignited, Brent crude oil rose 4.5% in two days, bringing its year-to-date gain to 51%. As a result, 10-year government bond yields in Germany, the UK, and Japan hit their highest levels since 2011, 2008, and 1996 respectively on Tuesday, while the US 10-year Treasury yield also climbed to a rare high since the financial crisis. Facing market turmoil, US Treasury Secretary Scott Bessent publicly stated at the G20 summit that high yields reflect a strong economy and promised "we will get through this"—but the market is not buying it.

The core risk in the current situation is that years of fiscal stimulus and military spending have significantly weakened the fiscal foundations of major industrial countries, and rising oil prices are spreading inflationary pressures from the energy sector to broader consumer prices. According to the Wall Street Journal, in the Federal Reserve's preferred inflation gauge, 54% of goods prices are rising more than 3% year-over-year, far above the historical average of about 32%. Investors now face the question: if the September 11 CPI data exceeds expectations, or if the Federal Reserve fails to raise rates at its subsequent meeting, can bond market pressures be absorbed without spilling over into the stock market?

Oil Prices Are the Trigger for This Bond Sell-off

The direct trigger for this synchronized global bond sell-off is the renewed military conflict between the US and Iran. Brent crude oil rose 4.5% in two trading days, with a year-to-date gain of 51%.

The sharp rise in energy prices is intensifying inflationary pressures across regions. The Eurozone inflation rate accelerated to 3.3% in August from 2.9% in July, exceeding expectations. Analysts note that the global synchronicity of this bond sell-off indicates that the driving force is the global factor of oil prices, rather than any single country's fiscal problems.

Analysts believe that after the COVID-19 pandemic and the Russia-Ukraine conflict, years of fiscal stimulus and military spending by major industrial countries have significantly deteriorated their fiscal positions, with accumulated deficits acting as "dry tinder," and the reignition of the Iran conflict is the spark.

Bessent: High Yields Signal a Strong Economy, Fiscal Consolidation May Take Months

Facing market pressure, Bessent defended the current situation at a G20 press conference in Asheville, North Carolina. He attributed the current high yields to three factors: solid economic growth, a "temporary inflation shock" from rising energy prices, and a surge in capital spending driven by the AI investment boom.

Bessent said that AI-related capital spending has created a "dilemma" for the bond market in the short term, but in the long run, these investments will bring significant productivity gains and ultimately have a "very strong disinflationary effect," pushing inflation and long-term yields lower.

On fiscal consolidation, Bessent said on Monday that a package could take weeks or even months to materialize, disappointing market expectations for swift government action to reduce the deficit. He also said that oil prices will eventually fall, but "I don't know if it's today, tomorrow, or next week."

Fed Stance and Inflation Data Are Key Variables

With fiscal policy unlikely to act quickly, market attention turns to monetary policy. Fed Chair Warsh said in a speech at the Jackson Hole conference last week that signs of inflation broadening have emerged—in the Fed's preferred inflation gauge, 54% of goods prices are rising more than 3% year-over-year, far above the historical average of about 32%, indicating that energy price increases are seeping into broader inflationary pressures. Warsh said the Fed is ready to act to curb inflation.

However, Bessent said in a CNBC interview that central banks traditionally do not raise rates in response to supply shocks unless there are "second- or third-order effects." This statement creates subtle tension with Warsh's hawkish signals.

The market now faces two key milestones: the September 11 CPI data and the Fed's policy meeting five days later. If inflation data exceeds expectations, or if the Fed fails to deliver on rate hikes, analysts warn that the risk of another market downturn in September will rise significantly.

Will the Stock Market Be the Next to Come Under Pressure?

During the G20 summit, Bessent was juggling multiple fronts: managing the yen-dollar exchange rate, stabilizing long-term Treasury yields, and dealing with renewed trade friction with Canada. According to Japan Broadcasting Corporation (NHK), Bessent said in a meeting with the Bank of Japan governor and finance minister that "Japan needs to make clear to the market that it is moving toward higher interest rates and fiscal sustainability."

Analysts note that until the situation in the Persian Gulf stabilizes, central bank tightening and fiscal consolidation efforts may only have a marginal effect. With oil prices remaining high and inflation expectations rising, the pressure on global bond markets is unlikely to reverse in the short term, and once bond market stress spreads further, the stock market will be the next to come under pressure.