EU Market Open: Bond rout continues as energy futures surge; NZD underperforms after RBNZ

• US Central Command said forces successfully completed a wave of strikes against Iranian military targets on September 1st.
• IRGC said it targeted US bases in Iraq, with missiles and drones. Iran's army also launched drone attacks on the US base in Bahrain, while Kuwaiti air defences confronted attacks by hostile drones.
• Crude futures continued to rally after surging by at least 5% yesterday as the US and Iran exchanged a fresh wave of strikes.
• NZD/USD underperformed after the RBNZ hiked the OCR by 25bps to 2.75%, which was widely expected, although the central bank refrained from any major hawkish surprises.
• APAC stocks were pressured as the risk-off mood persisted following a surge in oil prices and upside in yields; European equity futures indicate a lower cash market open.
• Looking ahead, highlights include US Factory Orders (Jul), ADP Employment Change (Aug), New Zealand Terms of Trade (Q2), BoC Announcement, Fed Beige Book. Comments from ECB's Nagel, BoC’s Macklem & Roger. Earnings from Broadcom, Hewlett Packard Enterprise & Snowflake.

SNAPSHOT

LOOKING AHEAD

• Highlights include US Factory Orders (Jul), ADP Employment Change (Aug), New Zealand Terms of Trade (Q2), BoC Announcement, Fed Beige Book. Comments from ECB's Nagel, BoC’s Macklem & Roger. Earnings from Broadcom, Hewlett Packard Enterprise & Snowflake.
• Click for the Newsquawk Week Ahead.

IRAN CONFLICT

• US President Trump said the US was striking Iranian targets near the Strait of Hormuz, while he stated the strikes were larger and more powerful and were in retaliation for Iran’s failed attempt to add sea mines to the Strait and attacks on the US base in Jordan. Trump added "If the failed Nation of Iran retaliates for this very justified attack, they will be hit again at a much harder and higher level, but it will not be the biggest attack of them all, that is waiting in the wings and, when it is over, there will be very little left of the Islamic Republic of Iran!"
• US President Trump warned that if Iran responded, it would be hit much harder, while he commented that they conducted a very big hit and "If it goes a third time, they’re going to be totally wiped out as a country.” Trump also commented that he thinks an agreement with Iran isn't worth the paper it's written on and said they gave Iran a lot of chances.
• US President Trump posted "I’m not trying to force Iran to the bargaining table, as ABC Fake News reported. I couldn’t care less if they sign a worthless, to them, agreement. I like our position now much better, with almost total control of the Hormuz Strait, and their economy totally collapsing. They are just playing out the inevitable."
• US Treasury Secretary Bessent said Iran doesn't control the Strait of Hormuz and the US took out Iranian radar along the strait, as well as got 17mln bbls of crude out on Monday. Bessent said that China pays Iran in yuan and when yuan cannot be converted to dollars, Iran starves, while he said they are in an acceleration phase of Iran bankruptcy and maybe Iran will lash out more kinetically.
• US Central Command said forces successfully completed a wave of strikes against Iranian military targets on September 1st in which they struck targets including air defence sites, radar systems, maritime assets and facilities, mine laying capabilities, and communications sites. CENTCOM stated that the strikes follow recent attempted attacks by the IRGC against commercial shipping in the Strait of Hormuz and against American service members, while it added that more than 50,000 US service members are currently operating across the Middle East and remain vigilant, lethal, and prepared to continue executing operations directed by the Commander in Chief.
• US strikes on Iranian targets on Tuesday included two Iranian government tankers under a new 'tanker for tanker' approved by US President Trump to deter Iranian attacks on tankers, according to Axios. Furthermore, US officials said around 100 targets were attacked during the strikes, while it was separately reported that the US assessed Iran was planning to expand attacks against commercial ships.
• Iran launched missiles in retaliatory attacks against US bases and interests, while it later commented that attacks on US forces will continue until they regret their crimes.
• Iranian President Pezeshkian said they absolutely do not want war and believe it is not in anyone's interest, according to Al Jazeera.
• Yesterday, a military source told Tasnim that Iran would respond to US attacks in multiple ways and that the response would be multiple times their attacks.
• IRGC spokesperson said severe punishment awaits the aggressors and the US will regret its new attacks, while the IRGC said it attacked a US Marines base in Jordan and claimed that a large number of US forces were killed in the attack. However, US officials denied any US casualties from the Iranian attack in Jordan so far, and Jordan's military also reported no casualties from the incident.
• Several explosions were heard in Iran’s Bandar Abbas, Qeshm, Chabahar, Jask and Sirik, while the IRGC said it targeted US bases in Erbil, Iraq with missiles and drones. Iran's army also launched drone attacks on the US base in Bahrain, while Kuwaiti air defences confronted attacks by hostile drones.
• IRGC said the US attacks will tighten the lock on the Strait of Hormuz.
• Russia was secretly helping Iran develop advanced supersonic cruise missiles, according to FT.

US TRADE

EQUITIES

• US stocks closed lower as this week's theme continued to be dominated by higher yields and oil prices amid the continuing hostilities in the Middle East. Today, Iran fired on tankers transiting the Strait of Hormuz, the US responded with fresh strikes on IRGC targets/radars near the Strait, and in turn, the Iranians fired back at the US. As such, oil prices settled USD 4+ higher per barrel, short-end and belly yields hit new YTD highs, the dollar was firmer, while gold declined. Furthermore, Trump didn't seem keen to pursue diplomacy and said he thinks an agreement with Iran isn't worth the paper it's written on, and warned if Iran responds, they will be ‘totally wiped out as a country’.
• SPX -0.71% at 7,632, NDX -1.29% at 29,077, DJI -0.79% at 52,772, RUT -1.23% at 2,920.
• Click here for a detailed summary.

TARIFFS/TRADE

• US President Trump posted, "Very productive and positive conversations were had today at the G20 Finance Ministers Meeting in Asheville".
• US Treasury Secretary Bessent said at the G20 press conference that the days of settling for sub-par growth are over and he had hoped to announce a unanimous joint communique, although all but China reached a consensus. Furthermore, he said it is unsustainable to have a non-market economy export surge and that it is clear China was the dissenter at G20.
• G20 Chair statement was issued after China opposed joint communique language on trade policy, while the statement noted that the global economy remained resilient in the face of multiple shocks, including ongoing wars and conflicts, while the G20 is concerned by continued disruptions to energy trade and stress-free navigation through the Strait of Hormuz. It also stated that advancing growth is a key priority across G20 economies and working to address impediments to growth, including regulatory and administrative burdens, while G20 finance leaders urged countries to avoid unnecessary export restrictions to ensure supply chains function normally.
• Mexican President Sheinbaum said US tariffs are creating difficulties, yet the economy is still resilient.

NOTABLE HEADLINES

• US President Trump announced sending millions of dollars to several states to support recovery efforts following storms, winds, tornadoes and floods.
• US House voted 370-48 to pass a short-term funding bill to avert a government shutdown and provide funding through December 11th, which goes to US President Trump for signing.

APAC TRADE

EQUITIES

• APAC stocks were pressured as the risk-off mood persisted following a surge in oil prices and upside in yields, triggered by the latest exchange of US-Iran strikes, while President Trump warned that the "biggest attack of them all... is waiting in the wings" and that there will be very little left of Iran.
• ASX 200 was dragged lower by underperformance in miners, materials, resources and tech stocks, while better-than-expected GDP data was overshadowed by the geopolitical escalation in the Middle East.
• Nikkei 225 fell amid pressure from mining and tech, while there were comments from US Treasury Secretary Bessent, who called on Japan to stop reflation and shift from Abenomics to Takaichi-nomics.
• KOSPI led the declines in the region with tech stocks hit alongside the higher yield environment.
• Hang Seng and Shanghai Comp conformed to the broad downbeat mood amid weakness in some auto names following monthly sales updates and with the mainland not helped after the PBoC's open market operations amount was at zero.
• US equity futures were lacklustre after declining alongside the continued geopolitical escalation.
• European equity futures indicate a lower cash market open with Euro Stoxx 50 futures down 0.4% after the cash market closed with losses of 0.8% on Tuesday.

FX

• DXY kept afloat after gaining alongside higher oil prices and yields as Middle East tensions escalated with the US launching attacks inside Iran and with Iran retaliating, while US President Trump had warned that if Iran responded, they would be ‘totally wiped out as a country’. Elsewhere, there was little reaction to the recent US data and to comments by Fed's Barr, who stated if inflation does not moderate soon, it will be time for an interest rate hike, but also said he favours steady rates if confident inflation is moderating.
• EUR/USD marginally weakened after returning to sub-1.1600 territory amid a firmer dollar and with little reaction to EU inflation data, while hawkish comments from ECB officials did little to shift the dial.
• GBP/USD tested the 1.3500 level to the downside and failed to benefit from recent comments from BoE's Mann, who said it is better for interest rates to be a little bit too high and then correct if necessary.
• USD/JPY saw two-way trade with USD/JPY at the 160.00 level after Japan's currency was pressured amid higher oil prices and US yields, putting participants on intervention alert, while it was reported that BoJ Governor Ueda met US Treasury Secretary Bessent on the sidelines of the G20 on Sunday and discussed monetary policy, although Ueda refrained from divulging the details of the discussions, while Bessent separately called for Japan to stop reflationism and shift from Abenomics to Takaichi-nomics.
• Antipodeans were somewhat varied, with AUD/USD briefly supported by stronger-than-expected Australian GDP data, while NZD/USD underperformed after the RBNZ hiked the OCR by 25bps to 2.75%, which was widely expected, although the central bank refrained from any major hawkish surprises and the latest rate projections were little changed from the previous.
• PBoC set USD/CNY mid-point at 6.7829 vs exp. 6.7238 (prev. 6.7809)

FIXED INCOME

• 10yr UST futures slightly dipped beneath the prior day's trough after yields climbed alongside continued upside in oil prices as geopolitics dominated the tape.
• Bund futures remained pressured amid higher energy prices and recent hawkish ECB comments.
• 10yr JGB futures tracked losses in global peers, with US Treasury Secretary Bessent providing more opinions on Japanese policy in which he noted that they should stop the reflation now and that Abenomics has worked, but added that it is time for Takaichi-nomics and that Japan needs to shift. There were also comments from BoJ Governor Ueda, who noted that monetary conditions remain accommodative so they would like to continue increasing rates, but refrained from commenting regarding the details of his recent discussion with Bessent, and on the market pricing of a strong chance of a rate hike this month.

COMMODITIES

• Crude futures continued to rally after surging by at least 5% yesterday as the US and Iran exchanged a fresh wave of strikes, while US President Trump even warned that if Iran responded, they’ll be hit much harder and that they’re going to be totally wiped out as a country.
• US Private Inventory Data (bbls): Crude -2.6mln (exp. -0.8mln), Gasoline +0.3mln (exp. -2.4mln), Distillate -0.3mln (exp. -1.3mln), Cushing +0.2mln.
• US Energy Secretary Wright said 17mln bbls of oil transited the Strait of Hormuz on Monday.
• US official said the next phase of talks regarding the transition in Venezuela will resume in the middle of the month and that the US will continue to push for private-sector US investment. Furthermore, the official said Chevron (CVX) will announce expanding operations in Venezuela, while Energy Secretary Wright was heading to Venezuela for signings.
• Venezuela's total oil exports were almost unchanged in August at 1.17mln bpd.
• Spot gold continued to decline amid a firmer dollar and higher-yield environment, which saw prices dip beneath the USD 4,300/oz level.
• Copper futures remained pressured with global risk sentiment spooked by the geopolitical escalation in the Middle East.

CRYPTO

• Bitcoin was choppy and heads into the European session relatively flat around the USD 77,500 level.

NOTABLE ASIA-PAC HEADLINES

• US Treasury Secretary Bessent said he emphasised the importance of sound formulation and communication of monetary policy to anchor inflation expectations in a meeting with BoJ Governor Ueda. Furthermore, he expressed strong support for Japan's decisive market and monetary steps to address the substantial undervaluation of the yen, while he noted the role of yen weakness in contributing to domestic inflationary pressures in Japan.
• US Treasury Secretary Bessent said Japan should stop the reflation now and that Abenomics is done, stating that Abenomics has worked and it is time for Takaichi-nomics. Bessent also commented that Japan is one of the most vibrant economies of the world now and that it succeeded in reflating, but now needs to shift.
• BoJ Governor Ueda said he discussed with central banks the need to communicate for appropriate monetary policy to achieve price stability as the global environment changes, while he said he held talks with Bessent, but did not comment on the details of their meeting and stated they held productive discussions on various topics. Ueda also refrained from commenting on day-to-day market moves or on markets pricing a strong chance of a September rate hike, although he stated that data released since the July meeting has been broadly in line with the projections in the quarterly report and that their basic monetary policy stance is largely unchanged from July. Furthermore, he said monetary conditions remain accommodative, so we would like to continue increasing rates, and stated that they have raised the policy rate five times so far, so need to carefully assess how the cumulative impact could affect the economy, but will also take upside price risks into account when deliberating policy.
• BoJ's Takata (hawkish dissenter) said he believes the BoJ needs to conduct rate hikes nimbly after gauging the degree of accommodation in domestic financial conditions, in addition to examining developments overseas. Takata also commented on the need to take a flexible approach to policy and that Middle East pressures could push inflation above target.
• RBNZ raised the OCR by 25bps to 2.75%, as expected, with the MPC reaching a consensus on the decision, while the Committee judged that gradually removing monetary stimulus is appropriate to return inflation to the 2% target mid-point while supporting growth and employment. RBNZ said the decision reduces the risk that the OCR needs to increase by more later and that future policy decisions will depend on the Committee’s judgement of the balance of risks to medium-term inflation. In terms of the projections, the OCR is seen at 2.81% in December 2026 (prev. 2.84%), 3.12% in September 2027 (prev. 3.11%), 3.15% in December 2027 (prev. 3.15%) and at 3.28% in September 2029. RBNZ Minutes stated that the future OCR path is not pre-determined and indicators of medium-term inflation are consistent with inflation returning to the target.
• RBNZ Governor Breman said she expects economic growth to strengthen and broaden, while she noted that OCR projections are relatively in line with prior forecasts and that they are moving the OCR up towards neutral and it is still accommodative, but noted uncertainty regarding the neutral rate. Furthermore, she said they may need to take some time to assess the stance of policy and are not on a preset course, with the rate hike timing highly uncertain, although stated there will likely be a further OCR increase and will assess the impact of hikes already done.

DATA RECAP

• Australian GDP Growth Rate QQ (Q2) 0.4% vs. Exp. 0.3% (Prev. 0.3%)
• Australian GDP Growth Rate YY (Q2) 2.1% vs. Exp. 1.8% (Prev. 2.5%)

GEOPOLITICS

RUSSIA-UKRAINE

• Russian President Putin said Russia has blocked a large enemy force in eastern Ukraine and keeps striking Ukrainian ports and energy facilities, while it is preparing massive strikes on Ukraine's energy targets. Putin also commented that Ukrainian President Zelensky's threat to close Russian airspace is state terrorism and that Moscow will respond, as well as noted that Ukrainian strikes caused real damage, but it is not critical. Furthermore, he said rumours that Russia is planning a new mobilisation to expand the army for Ukraine are utter nonsense.
• Russia attacked Ukraine's Odesa and damaged infrastructure, according to an official.
• German Interior Minister said Russia was involved in the attempted drone attack on a Ukrainian cargo plane at Leipzig/Halle airport.

EU/UK

NOTABLE HEADLINES

• ECB's Makhlouf said the ECB must be prepared to lift interest rates further and the combination of Eurozone inflation above 3% and robust growth makes him uneasy, according to FT.