LONDON, Sept 11 : A selloff in global bond and equity markets paused on Friday as oil prices retreated from a four-month high, though the recent surge in energy costs continued to fuel inflation worries and expectations that central banks may need to tighten policy.Brent crude hit a four-month high of $109.97 a barrel on Friday after a 6 per cent jump the day before, but it soon ran into selling pressure and was last down over 3.5 per cent at $103.64. It was still set for a weekly rise of over 7.5 per cent. Oil flows remained restricted through the Strait of Hormuz as the U.S. and Iran traded attacks, although prices have fallen after the Financial Times reported that foreign ministers in the Middle East were trying to work out a temporary deal to manage shipping through the waterway.But markets are still pricing in the risk of a protracted war. Comments from President Donald Trump that the conflict could last beyond the November midterm elections haven't helped, with bond yields surging globally on heightened inflation fears.
"Markets are pricing in a scenario of higher rates for longer," said Gustav Helgesson, macro strategist at SEB. The benchmark 10-year Treasury yield was slightly lower on Friday at 4.94 per cent, helped by retreating oil prices. It earlier touched its highest in almost three years at 4.979 per cent.The 30-year yield scaled another 19-year top of 5.3836 per cent before falling back to 5.352 per cent. Bond yields move inversely with prices. The 2-year yield hit a new 14-month peak of 4.5961 per cent after surging 12 bps on Thursday as markets ramped up bets that the U.S. Federal Reserve will have to raise interest rates this month to tame inflation, currently priced at about 67 per cent probability. The selloff in the U.S. bond market on Thursday was partly due to a Treasury buyback programme that fell short of the expected $6 billion value. In Europe, the 10-year German Bund yield was up 1 bp for the day and up 17 bps for the week, its biggest weekly rise since March. EYES ON CPIThe recent surge in oil prices has raised the stakes for August U.S. consumer price data due later in the day, which could make or break the case for a Fed rate hike next week. Forecasts are centred on a 0.2 per cent monthly rise in the core measure of CPI, although risks are skewed towards a higher number as the PPI data overnight showed some stickiness."Ahead of every payrolls print, every CPI print, it feels like it's the most important print yet, but it definitely feels like this one is," said SEB's Helgesson."If we see a big divergence from expectations, we'll see very big market swings as well."Analysts at JPMorgan now expect eight of the nine developed-market central banks to hike interest rates by the year end, including the Fed, BOJ, all four central banks in Europe, and the reserve banks of Australia and New Zealand."The tightening is for now expected to remain shallow, but risks to our forecasts lean in the direction of more action in the face of resilient growth, sticky core inflation, and commodity price pressures," they said in a note.The European Central Bank raised interest rates on Thursday for the second time this year and some officials see more tightening ahead with October in play. RELIEF FOR EQUITIESEuropean equity indexes took comfort from a dip in oil and gas prices although they were still set for sharp weekly falls. The pan-regional STOXX 600 was up 0.6 per cent on Friday but down 1.5 per cent this week. Nasdaq and S&P 500 futures both rose about 0.6 per cent.Asian stocks finished with sharp losses. MSCI's broadest index of Asia-Pacific shares outside Japan lost 1.5 per cent while Japan's Nikkei tumbled 1.9 per cent. The U.S. dollar lifted with higher Treasury yields, having gained 0.4 per cent on Thursday against its major peers. It was up 0.1 per cent on Friday at 99.17. Gold rose 0.7 per cent to $4,344 an ounce after dropping nearly 2 per cent on Thursday.
