Oil below $106 but US stocks stay under pressure

Oil finally gave some back. Brent dropped under 106 dollars on Friday morning, snapping a two day rally, after reports of mediation around the Strait of Hormuz. US indices are not cheering. Futures are lower again, because the real weight on Wall Street sits somewhere else, in long bond yields at their highest since 2007.

Oil retreats, US stocks do not follow

Thursday was a blowout for crude. Brent gained 4.71% to close at 107.93 dollars and WTI added 4.58% to 96.38 dollars, according to The National, after talks between Washington and Tehran stalled at the UN General Assembly and Houthi missiles hit Saudi Arabia again.

Friday flipped the tone. Brent slid to 105.31 dollars, down 1.2%, with Qatari officials mediating toward a phased reopening of the strait, Trading Economics reports. Over one month crude is still up 21%.

The indices barely moved. The S&P 500 closed Thursday almost flat at 7,704, the Nasdaq erased its losses late in the session and the Dow shed 0.31%. On Friday futures are down again and the Dow is heading for a fourth straight weekly loss.

Long yields hurt more than the barrel

This is the real story. The US 10 year yield trades around 5.10% to 5.20%, the highest since 2007, and the 30 year is above 5.43%, a level unseen since 2004. While long money costs that much, valuation multiples cannot expand.

Collin Martin, head of fixed income research at the Schwab Center for Financial Research, put it plainly. Schwab quotes him saying the bond market is signalling that the economy holds up, that inflation is still a concern and that rates may need to stay higher than investors expected.

Rick Rieder, BlackRock's CIO of global fixed income, said much the same in blunter words, relayed by Yahoo Finance. Not a crisis but an eye opener. He gives equities a B minus.

Why oil locks the whole chain

The link is direct. Expensive crude raises energy, transport and production costs. Those costs land in consumer prices, then in inflation expectations, then in long yields. It is the long yield that hits the indices, not the barrel itself.

Norbert Rucker at Julius Baer names the core issue. The ever looming risk of supply disruptions is inflating a persistent risk premium in prices. In other words the market is paying today for a shock that has not happened. If Hormuz reopens in stages, that premium deflates, inflation expectations cool and US stocks get room to breathe. If talks collapse, the reverse plays out.

Europe already took the hit. The DAX closed Thursday down around 0.6%, its lowest since 24 July, dragged by tech, autos and banks, per Trading Economics. Infineon lost 3.9%.

Key levels today

S&P 500 pivots from Investing.com, Brent levels from TradingKey. Brent trades at 105.31 USD on Friday morning, down 1.2% on the day so far.

Economic calendar

• Friday 14:30 Paris, August durable goods orders. A beat confirms manufacturing is holding and the 10 year can push toward 5.25%, which would weigh further on the indices. A soft print pulls the yield back toward 5.05%.
• Wednesday 30 September 14:30 Paris, August PCE prices and second quarter GDP. This is the one that counts. If core PCE accelerates on energy, the market pushes rate cut hopes further out and US indices stay stuck.
• Friday 2 October 14:30 Paris, September US employment report. A still solid labour market alongside expensive oil is the worst possible mix for equities right now.

The bottom line

Oil pulled back, and it is not enough to free Wall Street while the 10 year camps above 5%. Everything rides on Hormuz and on next Wednesday's PCE print.

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This is not investment advice.