Global Mood: Cautiously Risk-off
Drivers: Higher US yields, Iran-US talks, Trump-XI Summit

Asian markets turned cautious to risk-off on Thursday, as a sharp rise in US Treasury yields raised expectations of further Federal Reserve tightening and pressured risk assets. Japan’s Nikkei 225 rose 0.64% after a three-day holiday, while Topix fell 0.17% and Australia’s ASX 200 declined 1.33%; South Korea was closed. SGX Nifty was down 164.5 points, or 0.70%, at 23,281, pointing to a weaker opening for Indian equities.

The US 10-year Treasury yield climbed to 5.135%, its highest since July 2007, as stronger US activity and renewed inflation pressures lifted expectations for further Fed tightening. Brent rose above $101 a barrel, while US diesel topped $6.50 a gallon, adding to concerns over broader price pressures. Fed Governor Michael Barr indicated further policy adjustments could be needed. Meanwhile, Iran said major differences remain in indirect talks with Washington, keeping uncertainty around the Strait of Hormuz elevated.

THE BIG STORY
US business activity strengthened sharply, while input-price pressures hit a near four-year high. Fed Governor Michael Barr said further policy adjustments are likely as inflation risks rise.

Brent rose above $101 a barrel and US diesel prices topped $6.50 a gallon, increasing costs across the transport and production chain.

Tehran said major differences remain despite indirect talks, with reopening the Strait of Hormuz and lifting the US naval blockade among its key demands. Traffic through Hormuz has improved, but about a third of Gulf oil supply remains missing from global markets, keeping refined-fuel shortages elevated.

Russian drones hit Kyiv infrastructure and fuel stations, while Ukraine pushed for an energy ceasefire ahead of winter.

Data Spotlight
The S&P Global US Flash Composite PMI rose to 58.4 in September from 56.0 in August, the strongest expansion since July 2021, as services hit a five-year high of 58.7 and manufacturing accelerated to 56.7. 

The 30-year fixed mortgage rate climbed to 7.12% in the week ending September 18th, the highest since May 2024, after the Fed's 25 basis point hike and hawkish signals from Chair Warsh.  Rates have risen over 100 basis points since strikes against Iran began in late February, with total mortgage applications falling for a third consecutive week.

The Richmond Fed Manufacturing Index fell to -2 in September from 4 in August, its first negative reading in six months, as shipments and new orders both contracted. 

Takeaway: The US private sector's strongest expansion in over five years contrasts sharply with regional manufacturing weakness and mortgage rates breaching 7% for the first time since 2024. Intensifying price pressures and hawkish Fed signals suggest the cost of this growth momentum is rising, keeping the inflation and rate outlook finely balanced.

WHAT HAPPENED OVERNIGHT

US stocks fall as Iran defiance, surging yields, and Muse AI fears weigh on sentiment

• The S&P 500 lost 0.75%, Nasdaq dropped 1.13%, and the Dow fell 0.68%, as Iranian President Pezeshkian told UNGA Tehran would never surrender to US pressure, sending oil up 4%.
• The Philadelphia Semiconductor Index fell 1.2% with Nvidia down 1.5%; October Fed hike odds rose to 71% after Fed Governor Barr said further hikes are likely needed.
• Trump welcomed Xi to Washington for a three-day visit covering the trade truce extension, AI regulation, and US arms sales to Taiwan.

US Treasury yields surge to 2007 highs as strong PMI and Iran defiance cement hike expectations

• The 10-year yield surged up to 16bps to above 5.12%, its highest since 2007, as September S&P Global PMI showed private-sector activity expanding at its fastest pace in over five years with accelerating inflation across services and manufacturing.
• Iranian leaders' hawkish UNGA remarks dimmed hopes of near-term diplomatic progress on energy supply, compounding the inflation-driven yield surge.
• Over $1.5 trillion in AI company debt issuance this year continued to crowd out Treasury demand, with the latest 5-year note auction tailing 3.1bps, well above recent averages, signalling uneasy primary dealer appetite.

US Dollar surges to eight-week high as blowout PMI and oil rebound lift Fed hike bets

• The dollar index rose over 0.4% to above 101, its highest in eight weeks, after the S&P Global flash US Composite PMI hit 58.4 in September, its strongest reading since July 2021.
• Brent crude rose back above $100, ending a five-session losing streak, adding to inflationary pressure and reinforcing the case for further tightening.
• October hike odds rose to ~60% and December odds stand at ~48%, with markets watching US-Iran talks at UNGA for any progress that could ease the energy inflation backdrop.

Oil settles up 4% as Iran vows never to surrender, offsetting supply recovery signals

• Brent settled at $103.08/bbl, up 3.86%, and WTI at $92.16, up 1.81%, as Pezeshkian's UNGA vow never to surrender reversed earlier session losses driven by Saudi pipeline restart and Gulf supply recovery.
• Saudi Arabia restarted its East-West Pipeline on Tuesday after the September 11 attack, while Iraq said it is exporting over 3 million bpd with plans to boost Turkey flows above 600,000 bpd.
• A senior Iranian official told Reuters Hormuz could reopen within seven days if the US eases military pressure and lifts its port blockade, with indirect talks on Tuesday covering the strait and naval blockade.
• US crude inventories rose 3 million barrels to 426.4 million barrels last week, against expectations for a 641,000-barrel draw, adding a bearish inventory offset.
• US ultra-low sulfur diesel futures fell 5% after the White House denied a Politico report on a planned 90-day diesel export ban; Energy Secretary Wright said such a ban would not work.
• Ukraine and Russia both expressed interest in a limited ceasefire on grain and energy targets, per Secretary of State Rubio after meeting Russian FM Lavrov in New York.

Day’s Ledger*
Economic Data

• US Initial Jobless Claims
  
• US August New Home Sales

Corporate Actions

• NSE Listing

Policy

• ECB's Schnabel Speaks
  
• BoE MPC Member Bean Speaks
  
• US FOMC Member Williams Speaks
• BoE MPC Member Dhingra Speaks
• US FOMC Member Barkin Speaks
• BoE Breeden Speaks

Tickers to Watch

• OLA ELECTRIC MOBILITY seeks board approval for a proposed rights issue of equity shares.
• BHARAT DYNAMICS signed contract with Ministry of Defence for supply of Satellite Smart Anti-Airfield Weapons.
• EXIDE INDUSTRIES announced commissioning of Phase-I of its 6 GWh lithium-ion cell manufacturing facility.
• ESAF SMALL FINANCE BANK board approves raising up to 5 billion rupees via private placement of NCDs to augment Tier II Capital.

Must Read

• Two Tales of Trade Turnarounds
• Tokenisation Can Fix Bond Plumbing. It Cannot Create Liquidity
• Distorted Price Signals: Tariffs, Interest Rates, and Global Inflation in 2026
• Make in India at a Crossroads: Eleven Years On, Does the Policy Need a Rethink?
• Red carpet rolls out trade truce as Trump welcomes Xi
• Jaishankar raises Russia sanctions question with US

(*Compiled from various media sources)

See you tomorrow with another edition of The Morning Edge.

Have a great trading day