Global Mood: Cautiously Risk-on
Key Drivers: Prospect of another Fed hike, US-Iran war escalations 

Asian markets turned risk-on on Thursday, tracking a strong Wall Street rebound and gains in technology stocks as investors looked beyond the Federal Reserve’s hawkish outlook. Japan’s Nikkei 225 rose more than 1%, South Korea’s Kospi gained 2.3% and Kosdaq advanced 0.89%, while Australia’s S&P/ASX 200 rose 0.41%. SGX Nifty was up 8.5 points, or 0.04%, at 23,341.5, pointing to a largely flat opening for Indian equities. 

The Fed’s 25 bps hike to 3.75%-4.00% and signal for another increase failed to derail risk appetite, with renewed optimism around AI and its earnings potential supporting technology stocks. However, oil above $100 a barrel remains a key inflation risk.

THE BIG STORY
Saudi Arabia and the Houthis exchanged fresh strikes, while Houthi control of Yemen's Red Sea coast threatens the Bab el-Mandeb route. Brent remained above $100 and US diesel prices reached a record near $6.40 a gallon.

Beijing has privately urged Iran to use its influence over the Houthis to prevent further disruption to Red Sea shipping, as China remains heavily dependent on oil supplies from the region.

The Bank of Japan is expected to raise its policy rate to 1.25%, with the Fed's tightening adding pressure on the yen and potentially increasing imported inflation.

Russia continued attacks on Ukrainian cities while Ukraine struck Russian targets, including an oil refinery, keeping pressure on regional fuel and energy infrastructure.

Data Spotlight
Initial jobless claims fell 10,000 to 196,000 in the second week of September, approaching July's near 60-year low and well below expectations of 208,000. Continuing claims dropped 39,000 to 1,730,000, the lowest since January 2024, reinforcing the Fed's assessment of full employment.

The Bank of England held Bank Rate at 3.75% with a 6-3 vote, as three members again favoured a hike to 4%.  UK CPI rose to 3.1% in August, with further increases expected as West Asia-driven energy costs feed through, though second-round wage and price effects remain limited. 

The BoE MPC also unanimously agreed to wind down government bond holdings at £46 billion annually through 2034.

Japan's annual inflation held at 1.9% in August, a seven-month high, as household goods, healthcare and recreation costs accelerated. 

Core inflation eased slightly to 1.7% from 1.8%, remaining below the Bank of Japan's 2% target for a seventh consecutive month.

Takeaway: Near-historic low US jobless claims and the Fed's recent rate hike signal a tight labour market and a hawkish policy stance. The BoE's hold amid rising inflation and the BoJ's persistent undershoot of its 2% target reflect the varied inflation dynamics across major economies, all navigating the lingering impact of West Asia energy disruptions.

WHAT HAPPENED OVERNIGHT

US stocks rally as easing oil and Fed coherence spark relief bounce

• The Dow rose 0.62%, S&P 500 gained 1.14%, and Nasdaq climbed 1.69%, as markets digested Wednesday's unanimous Fed hike with relief, led by a broad tech rally.
• October hike odds rose to 53.1% from 27.2% a week ago, with Warsh reaffirming Fed independence and saying price stability need not harm the job market.
• Gold and silver miners and chips both advanced over 3%, while homebuilders gained 1.1% after single-family housing starts and pending home sales rose.
• Circle, Robinhood, and Coinbase each rose ~5-6% after the SEC unveiled a five-year exemption for tokenised stock trading.
• Initial jobless claims dipped to near their lowest since 1969, reinforcing Warsh's view that ensuring price stability need not harm employment.
• CoreWeave fell 4.2% after announcing plans to raise capital via stock and convertible bond offerings.

US Treasury yields pull back from 19-year highs as Fed hike restores credibility

• The 10-year yield fell to 4.95%, below this week's 5.04% peak, as the unanimous hike and Warsh's inflation commitment reassured investors on Fed policy credibility.
• The Fed raised the funds rate by 25bps, its first hike since July 2023, and signalled at least one further increase this year.
• The 2-year yield eased to 4.73% while the 30-year fell to 5.34%, reflecting a broad but modest curve rally post-decision.
• Investors had been concerned a surprise hold could trigger a surge in volatility, making the unanimous hike a stabilising outcome for bond markets.
• While the hike was fully priced in, the credibility restored by Warsh's press conference and the committee's unanimity helped cap further long-end selling.

US Dollar holds above 100 near seven-week highs after Fed's first hike in three years

• The dollar index held above 100 after Wednesday's sharp gain, with the Fed's unanimous 25bps hike to 3.75%-4% and signal of further tightening this year underpinning the greenback.
• Warsh said inflation remains too high, while August core CPI came in above expectations, keeping the case for additional tightening intact.
• Trump called for rates to be cut quickly to 1% or below in a social media post, though stopped short of directly criticising Warsh.
• The BoE is expected to hold today while the BoJ is set to hike on Friday, with diverging central bank paths adding to dollar support.

Oil settles 1% lower but holds above $100 as Saudi workaround offsets pipeline damage

• Brent settled at $104.82/bbl, down 0.95%, and WTI at $101.91, down 0.5%, as Saudi Arabia's offer of crude via Oman ship-to-ship transfers partially offset East-West pipeline disruption.
• Three pumping stations along the pipeline were damaged in last week's attack, with the repair timeline unclear, though Saudi Arabia is seeking to restore half capacity within days.
• Hormuz tanker traffic continues to fall while Saudi-Houthi exchanges across the Yemen border keep Red Sea shipping and regional energy infrastructure exposed to further disruption.
• European gasoil and US ULSD futures settled at record highs on Tuesday as West Asian and Russian refinery disruptions tighten diesel supply.
• A Ukrainian drone attack damaged a Yaroslavl refinery on Thursday.
• DBS Bank's base case assumes US-Iran tensions ease in October-December, with Brent stabilising in an $85-$95/bbl range.

Day’s Ledger*

Economic Data 

• Germany August PPI
• India Weekly FX Reserves Data
• US August Industrial Production
  

Corporate Actions 

• Power Grid Corporation of India and Vedanta to consider fund raising

Policy

• Bank of Japan  Interest Rate Decision
• ECB President Lagarde Speaks
  
• FOMC Member Bowman Speaks
  
• US Fed Schmid Speaks

Tickers to Watch

• TATA GROUP STOCKS -- N Chandrasekaran's reappointment as Tata Sons Chairman for another five-year term sparks governance standoff. Tata Trusts Chairman Noel Tata calls the resolution legally void, insisting Trusts' nominee directors must approve any chairman appointment.
• BHARAT ELECTRONICS secures additional orders worth 6.48 billion rupees since last disclosure on August 26, 2026.
• WIPRO launches Wipro STO360™, developed with Aramco and SAP, to help asset-intensive organisations modernise Shutdown, Turnaround and Outage (STO) management.
• HINDUSTAN CONSTRUCTION COMPANY subsidiary HCC Infrastructure Company approves incorporating a public limited company jointly with Ceigall India, with HCC Infrastructure holding a 51% stake.
• HINDUSTAN AERONAUTICS to hand over Tejas twin-seater trainers, HTT-40 basic trainers and Dhruv Next Generation helicopters to Indian operators at a Bengaluru event Friday.

Must Read

• The Chairman and the Boulder
• Warsh Starts With a Hike, but Keeps the Fed’s Next Move Open
• How Much of RBI’s Rate Cuts Actually Reached Borrowers and Savers?
• UPI MDR: Who Benefits, and What Govt FAQ Doesn’t Answer
• The Retailer We Don’t See
• Replacing Powell with Warsh Didn't Work, At Least Not Yet

(*Compiled from various media sources)

See you tomorrow with another edition of The Morning Edge.

Have a great trading day