Global Mood: Cautiously Risk-off
Drivers: Elevated crude oil prices, Higher US Treasury yields

Asian markets traded mixed on Tuesday as investors maintained a cautious risk-off bias, balancing selective gains against concerns over elevated oil prices, higher bond yields and geopolitical tensions. Japan’s Nikkei 225 rose 0.22%, while Australia’s ASX 200 fell 0.48%, South Korea’s Kospi declined 0.18% and New Zealand’s NZX 50 slipped 0.1%. SGX Nifty was up 87.5 points, or 0.37%, at 23,531, signalling a positive opening for Indian equities.

Brent settled 1% higher at $105.68 a barrel as stalled talks on reopening the Strait of Hormuz and fresh Houthi attacks on Saudi Arabia raised concerns over prolonged supply disruptions. Oil prices are also adding to inflation risks, with the US 10-year Treasury yield above 5%, reinforcing pressure on equities and limiting expectations for monetary easing. US stocks ended lower, with the S&P 500 down 0.48% and Nasdaq 0.56%, while technology stocks faced renewed pressure following safety concerns around advanced AI development. Broader geopolitical risks remain another drag on sentiment.

THE BIG STORY
The West Asia energy shock intensified Tuesday as Iran-aligned Houthis launched another wave of missile and drone attacks on southern Saudi Arabia while retaining control of almost the entire Yemeni Red Sea coast, including the strategic Perim Island. The escalation threatens Saudi Arabia's alternative oil-export routes after an attack last week knocked its 1,200-km east-west pipeline to the Red Sea offline; traders estimate a prolonged outage could remove as much as 4% of global oil supply while the Strait of Hormuz remains largely blocked. Brent had already settled 1% higher at $105.68 a barrel, while the postponement of planned talks between Iran and Gulf states over reopening Hormuz further reduced hopes of a near-term easing in supply disruptions. With Hormuz still largely shut and Houthi forces advancing towards the Bab el-Mandeb, risks are increasingly centred on simultaneous disruption to both major maritime routes out of the region, keeping oil and refined-fuel inflation elevated.

The widening conflict is also complicating the outlook for global monetary policy and risk assets. Washington has so far resisted Saudi requests for direct military intervention, limiting its role to intelligence support, while Riyadh and Yemen's forces have stepped up airstrikes against the Houthis and Pakistan has warned Iran against further attacks on Saudi territory. The lack of progress on Hormuz negotiations and continued Israeli-Hezbollah tensions add to the risk of a prolonged conflict, challenging President Donald Trump's expectation that the war will end after the November midterm elections. In the US, inflation concerns from elevated oil prices have pushed the 10-year Treasury yield above 5%, while markets price a roughly 90% chance of a 25-basis-point Fed hike this week, despite political pressure on the central bank to ease. The combination of higher energy prices, tighter monetary policy and elevated government borrowing costs is increasingly weighing on global equities, with the S&P 500 falling 0.48% and the Nasdaq 0.56% on Monday.

Data Spotlight
Canada's annual inflation held steady at 3.0% in August, in line with expectations and below the post-Iran conflict peak of 3.2%, as gasoline inflation eased slightly to 22.8% from 25.7%. Grocery price growth slowed to 2.8%, falling below the headline rate for the first time in over two years, while both Bank of Canada core measures held near target at 1.9% and 2.0%.

South Korea's export prices surged 42.4% year-on-year in August, easing from 48.9% in July, led by a 113.2% jump in computers, electronic and optical equipment and a 65.9% rise in coal and petroleum products. The Export Volume Index rose 25.9% and the Export Value Index climbed 75.8%, while the monthly Export Price Index fell 3.7%.

The 10-year US Treasury yield pulled back to 4.96% after briefly testing a 19-year high of 5.01%, as wholesale fuel prices eased following signals of a Russia-Ukraine energy infrastructure truce. Markets are fully pricing a 25 basis point Fed rate hike on Wednesday, with long-dated yields also pressured by surging AI-related corporate debt issuance and hawkish ECB and Bank of Japan expectations.

Takeaway: Treasury yields testing 19-year highs and markets fully pricing a Fed hike reflect the cumulative inflation toll of the West Asia conflict and tariff pressures. Canada's stabilising inflation and South Korea's easing but still-elevated export price growth suggest some moderation at the margins, though the broader global rate environment remains decidedly hawkish.

WHAT HAPPENED OVERNIGHT

US stocks fall as 10-year yield tops 5% and AI safety concerns pummel chipmakers ahead of Fed meeting

• The S&P 500 lost 0.48%, Nasdaq dropped 0.56%, and the Dow fell 0.29%, as AI safety concerns and the 10-year yield briefly topping 5% for the first time since 2023 rattled markets ahead of Wednesday's Fed meeting.
• The Philadelphia Semiconductor Index tumbled 5.9%, trimming its 2026 gain to 57%, after leaders of Anthropic, OpenAI, and xAI warned of risks from rapid AI development in the starkest industry safety call yet.
• Nvidia fell 3.4%, Micron dropped over 5%, and Broadcom and AMD each fell over 4%, as the AI slowdown warning threatened the billions flowing into the sector that has driven markets to record highs.
• September Fed hike odds surged above 90% as per CME FedWatch, with the central bank widely expected to raise rates by 25 bps on Wednesday to combat oil-driven inflation.
• The S&P 500 now trades at 19 times expected earnings, its cheapest since April 2025's Liberation Day tariff shock.

US Treasury yields hold just below 5% as oil-driven inflation and imminent Fed hike keep pressure elevated

• The 10-year yield held near 5% after four consecutive sessions of gains, approaching its highest level since 2007, as oil resumed its climb on Saudi Arabia's East-West pipeline shutdown.
• September Fed hike odds stand at 92% following last week's hotter-than-expected inflation data, with Wednesday's decision now broadly viewed as a foregone conclusion.
• Ukraine disputed Trump's claim of a Russia-Ukraine energy infrastructure truce, keeping geopolitical uncertainty elevated and adding to the inflationary backdrop.
• Surging AI company corporate debt issuance continued to constrain primary dealer capital allocation for government securities, adding structural upward pressure on the long end of the curve.

US Dollar rises for a fourth straight session to two-week high as Fed hike anticipation builds

• The dollar index climbed to 99.6 nearly 90% odds of a 25 bps Fed hike this week, which would mark the first rate increase since 2023, driving broad-based greenback strength.
• Rising oil prices continued to worsen the inflation outlook, reinforcing the case for further Fed tightening beyond this week's expected move.
• AI safety warnings from leading tech CEOs weighed on risk sentiment, boosting safe-haven dollar demand.
• The dollar posted its biggest gains against the Japanese yen and the Australian dollar.

Oil settles 1% higher as Saudi pipeline strike and Houthi attacks stoke supply fears, before Trump Iran talk remarks cap gains

• Brent settled at $105.68/bbl, up 1.0%, and WTI at $101.39, up 1.3%, after initially jumping ~5% before retreating on Trump's comment that Iran wanted to reach a deal with Washington.
• A strike on Saudi Arabia's East-West pipeline knocked out a route carrying up to 4% of global oil supply, with Yanbu storage estimated to cover only five to seven days of exports.
• Houthis captured Perim Island at the mouth of the Red Sea and launched a major drone and missile attack on Saudi Arabia's Khamis Mushait airbase, while Gulf Arab states postponed planned talks with Iran.
• Hormuz commodity vessel transits fell to single digits over the weekend, well below the 10-day average of 14, as the dual disruption of Hormuz and the East-West pipeline leaves Saudi exports severely constrained.
• Trump said Ukraine and Russia had agreed not to target each other's energy infrastructure, with a potential Ukraine war settlement seen as allowing Russia to resume energy exports and adding a bearish supply offset.

Day’s Ledger*
Economic Data 

• India August Trade Balance
• India July BoP Data
• China August Industrial Production
• UK July Unemployment Rate

Corporate Actions 

• Earnings: CMI Limited 
• Bajaj Holdings & Investment to consider dividend

Policy

• NBS Press Conference
• German Buba Vice President Buch Speaks
• ECB's Schnabel Speaks
• FOMC 2-day meeting begins

Tickers to Watch

• HDFC BANK Shortlists two MD & CEO candidates — internal Deputy MD Kaizad M Bharucha and an external private bank executive. 
• BSE, ANGEL ONE, BROKING STOCKS:  SEBI's CAS consultation paper proposes blended VWAP, reverting to the old VWAP system, normal cash trading till 3:30, no live index values during CAS, and curbs on spoofing. Jefferies calls it positive for brokers and exchanges.
• TATA CHEMICALS, OTHER TATA GROUP STOCKS RBI rejects Tata Sons' application to voluntarily surrender its certificate of registration. Tata Sons must now list per RBI guidelines.
• IT STOCKS in focus after OpenAI, Anthropic chiefs and China's security chief call for a slowdown in AI development. AI-linked global stocks react negatively.
• COFORGE DK Singh resigns as independent director and NRC chairperson, citing board tensions. Beth Boucher named new NRC chairperson. Follows Chair OP Bhatt's September 8 exit after Advent opposed his reappointment.
• SUN PHARMA Subsidiaries settle US generic drug pricing antitrust case for a confidential amount. Case involves Sun Pharma Inc., Taro Pharmaceutical Industries and Taro Pharmaceuticals USA.
• HDFC LIFE INSURANCE CGST authority confirms GST demand of 9.4218 billion rupees and penalty of 24.2297 billion rupees, plus interest, for July 2017-March 2022.

Must Read

• Why Are Bond Yields Unyielding?
• Oil, Yields and Uncertainty: A Triple Whammy for Monetary Policy
• Why India Still Needs BRICS?
• When the Sidelines Mattered More Than the Summit
• Relinquishing the Wheel: Why Volkswagen’s JSW Gamble Faces a Brutal Reality Check
• HUL Has the Map of India but Rivals Are Finding the Consumers

(*Compiled from various media sources)

See you tomorrow with another edition of The Morning Edge.

Have a great trading day