Global stocks fell on Monday as the unresolved US-Iran conflict pushed oil prices sharply higher and investors prepared for a week of potentially market-moving economic data, while rising bond yields strengthened expectations that central banks will keep interest rates higher for longer.
The latest move in energy markets came after US President Donald Trump rejected an Iranian proposal to reopen the Strait of Hormuz, saying Tehran was desperate to reach a deal. Trump said negotiations would continue this week, but Iran has shown little indication that it is prepared to soften its position.
Brent crude futures rose as much as 3% to $107.16 a barrel, extending its monthly advance to nearly 20%. Oil is now almost 50% above its level before the war began in late February, while refined-product prices have risen even more sharply.
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The surge is becoming a growing problem for financial markets because the shock is no longer confined to crude. A shortage of refining capacity has pushed diesel prices to record levels, raising concerns that higher energy costs could feed into transportation, production and eventually wage-setting decisions.
The development is yielding a more difficult environment for central banks. Policymakers have already responded with interest-rate increases, with the Reserve Bank of Australia expected to become the latest to tighten policy when it meets on Tuesday.
US markets are also pricing a significantly more restrictive Federal Reserve path. Futures imply a 68% probability of another Fed rate increase in October, with roughly 90 basis points of additional tightening priced through the end of next year.
The combination of stronger energy prices and higher expected interest rates is putting pressure on equity valuations, although strong US economic data have so far prevented a broader retreat from risk assets.
“The global expansion appears to have entered a phase of broad-based strength rarely seen over the past two decades,” Bruce Kasman, chief economist at JPMorgan, said.
“Amidst strong growth and firming perceptions of resilience to high energy prices, it is no surprise that rates are moving higher while equity prices remain close to record levels,” Kasman added. “What is most notable about recent market moves is their extension of higher policy rates well beyond the coming year.”
MSCI’s All-World index fell 0.1% on Monday and remained on course for a 2.4% quarterly gain. S&P 500 futures dropped 0.3%, while Nasdaq futures fell 0.7%.
Bond Markets Signal a More Persistent Rate Shock
The sharper warning is coming from government bond markets. The yield on 30-year US Treasuries rose two basis points to 5.517%, close to its highest level since 2004. The long-term yield has climbed 27 basis points this month.
Two-year Treasury yields have risen 55 basis points in September, their largest monthly increase since February 2023, as investors have brought forward expectations for further Fed tightening.
The rise in yields matters for equities because higher risk-free returns increase the discount rate applied to future corporate earnings. Technology and other growth stocks are particularly sensitive because a greater portion of their valuations depends on earnings expected further into the future.
Yet the bond selloff does not appear to be driven entirely by fears of an uncontrolled inflation resurgence.
“Market-based measures of inflation expectations have been relatively stable and for U.S. markets at least, remain well off the highs back in May,” said Steven Major, global macro advisor at Tradition.
“Consequently, the upward movement in nominal Treasury yields is predominantly explained by higher real yields and shifting policy expectations, rather than a runaway inflation risk premium,” he said.
This means that markets are effectively confronting two forces at once: an economy that is proving more resilient than expected and an energy shock that could make it harder for central banks to ease policy.
The week’s economic calendar could determine whether that repricing continues. Investors are due to receive fresh readings on inflation, gross domestic product, manufacturing activity and employment, giving markets several opportunities to reassess the outlook for US growth and monetary policy.
Dollar Strengthens While Gold Loses Ground
The prospect of higher US interest rates has also supported the dollar. The dollar index climbed to a two-month high of 101.39 and was on course for its strongest monthly performance since June. The euro fell to $1.1383, taking its September decline to 2%.
The Japanese yen, meanwhile, strengthened against the dollar after Japan’s top currency diplomat, Atsushi Mimura, warned currency traders that Tokyo was prepared to respond to excessive declines in the yen.
The dollar was last down 0.3% at 156.83 yen.
Gold moved in the opposite direction, falling 3% to $4,151 an ounce. The metal has declined almost 7% this month as rising bond yields increase the opportunity cost of holding an asset that does not generate interest.
European stocks provided a partial counterpoint to the broader weakness. The STOXX 600 rose 0.4%, supported by defensive sectors such as pharmaceuticals as well as oil and gas companies, which are benefiting from higher energy prices.
Asian markets were weaker. China’s blue-chip CSI300 index fell 1.9% to its lowest level in a year after US lawmakers introduced legislation aimed at preventing the federal government from equipping sensitive systems with Chinese-made components used to transmit data in AI data centers.
The market backdrop is therefore becoming increasingly interconnected. The US-Iran conflict is pushing up energy costs; higher energy costs are complicating the inflation outlook, stronger inflation risks are reinforcing expectations for tighter monetary policy, and higher yields are putting pressure on asset valuations.
Additionally, resilient economic data are providing support for corporate earnings and preventing the energy shock from translating into a broad collapse in risk appetite.