Brent crude broke $100/barrel on Wednesday for the first time since July and added a further 3.7% on Thursday to trade near $105/barrel, leaving the benchmark up around 70% for the year. The level alone is not the news, since Brent has oscillated between $70/barrel and $102/barrel all year. What changed this week is that a series of institutions, each for its own reasons, conceded that the energy shock is not a temporary dislocation to be looked through but a durable feature of the coming quarters.
TRUMP’S THEORY
In Washington, United States (US) President, Donald Trump, predicted – ahead of the Republican convention in Dallas – that the war with Iran would end immediately after the 3 November midterms, arguing that Tehran is prolonging the conflict to influence the vote. He conceded that fuel prices are unlikely to fall before then, and that a negotiated settlement, while possible, is not being pursued. The forecast deserves scepticism, given that when the campaign began on 28 February the expectation was that it would only last for a few weeks, but the market now has a political date, attached to a military escalation that has lasted for eight weeks in which no de-escalation has been sought.
SAUDI ARABIA’S OUTPUT SQUEEZE
Riyadh reported to the Organisation of the Petroleum Exporting Countries (OPEC) secretariat that August crude production fell by 1.9 million barrels a day to 6.238 million, the lowest level since the Gulf War in 1990, with exports down to 3.2 million barrels a day according to global maritime intelligence and real-time vessel monitoring, Kpler’s tracking, and was at its weakest level in 13 years. This is not production discipline. The Saudi kingdom is not withholding barrels but losing them to closed export routes, with the Strait of Hormuz flows down below two million barrels a day against eight million to nine million before hostilities resumed. Supply to market, at 7.122 million barrels a day, exceeded production, so the shortfall is being covered out of inventory, and the wider position offers little comfort, with the Organisation of Economic Co-operation and Development commercial stocks at 2.73 billion barrels on the latest available June reading, some 67 million below the five-year average and 219 million below the 2015 to 2019 average. Nominal spare capacity approaching 10 million barrels a day is no buffer while Hormuz is closed, since quotas can be raised on paper without barrels reaching a buyer, which is why OPEC+ left October targets unchanged.
EUROPE’S OIL SHOCK
The European Central Bank (ECB) raised rates by 25 basis points on Thursday, taking the deposit facility to 2.50% and the main refinancing rate to 2.65%, after August eurozone inflation printed at 3.3% with its energy component at 14.3%. ECB President, Christine Lagarde, suggested that inflation will stay above target through the first half of 2027 and acknowledged that the oil shock is feeding into core and food prices, abandoning the doctrine that central banks look through supply-driven increases. Eurozone markets now carry an implied terminal rate above 3%.
THE FED’S RATE DILEMMA
Next week the US Federal Reserve (Fed) is expected to raise rates, and Thursday’s Producer Price Index (PPI) data strengthened the case for it. August producer prices rose 0.4% on the month, lifting the annual rate to 5.4% from a revised 4.8% in July against consensus of 5.3%, with final demand goods up 1.1% against services up only 0.1%. The composition matters because wholesale energy rose 4.2% and diesel alone climbed 24.1%, accounting for over a third of the monthly rise in goods prices, while core producer prices, excluding food and energy, rose only 0.2% against 0.3% expected. Wholesale inflation is accelerating on energy while the core decelerates, the clearest evidence yet that this remains a goods shock rather than a services one, and the moment services follow, the argument for looking through it collapses. Initial claims for the week to 5 September came in at 206,000 against 205,000 expected and continuing claims eased to 1.774 million, leaving a labour market that offers the Federal Open Market Committee (FOMC) no cover for restraint ahead of the 15 and 16 September meeting, with August Consumer Price Index (CPI) due out today and futures carrying roughly two-thirds odds of a hike.
THE US BOND ON THE UP AND UP
The bond market has drawn its own conclusion. The 10-year US Treasury yield reached 4.85% on Wednesday, its highest level since 2023, then added a further nine basis points on Thursday to 4.93%, roughly 90 basis points above where it stood a year ago. The Treasury tripled its buyback of longer-dated paper to as much as $6 billion and the market barely acknowledged it, the second failed attempt this cycle to lean against the long end by operation rather than tighter policy. Supply explains much of the indifference, with AI-related corporates having raised over $1.5 trillion in new debt, Tokyo selling Treasuries to defend the yen, and President Trump promising in Dallas a $5,000 payment to every American should Republicans hold Congress, costed above $1 trillion. A long end that will not respond to buybacks while energy costs rise and issuance expands is the most important signal in the week’s real-time data stream, and with the US Dollar Index (DXY) near 99, the dollar is taking its direction from that repricing rather than from risk sentiment.
SOUTH AFRICA STARING DOWN THE BARREL
While all of this is playing out, the rand has traded with a composure its history would not predict, holding around R16.10/$ to R16.20/$ and close to its strongest level since the war began in late February, but Thursday’s domestic data withdrew much of the justification for it. The second quarter current account swung into a deficit of R205.5 billion, or 2.6% of the country’s gross domestic product (GDP), from a surplus of R181.6 billion and 2.3% of GDP in the first quarter, a reversal of nearly five percentage points of output in three months and the clearest measure, yet, of what the energy import bill is costing South Africa.
The commodity cushion is thinning at the same time, with July gold production down 7.4% year-on-year after a 6.2% gain, and total mining output down 7.5%, so the high prices that have supported the terms of trade are being earned on falling volumes, while gold itself having slipped below $4,360/ounce. Domestic markets took the point, with the JSE All Share Index down 1.07% on Thursday and the 10-year South Africa Government Bond up to 8.89%. The rand has in any event absorbed only part of the shock, since roughly 80% of the R1.34 petrol increase and 93% of the diesel increase which took effect on 2 September came from international product prices rather than the exchange rate. Brent averaged $91/barrel in August against $84/barrel in July and September is tracking well above both, pointing to another increase on 7 October, while the South African Reserve Bank (SARB) meets on 23 September with the repo rate at 6.75%, having passed on the oil shock in both April and July.
WHAT DOES THE FOURTH QUARTER HOLD?
As we head towards the tail end of this year, the political calendar has created genuinely two-sided risk into the fourth quarter: a credible ceasefire after 3 November moves crude sharply lower and the rand firmer, continued escalation does the opposite, and neither is forecastable with confidence.
A LOOK AT THE MARKETS
THE WEEK’S KEY THEMES:
• US 10-year yields spiked to their firmest level since 2023
• Wall Street fell for a fourth straight session, with chipmakers leading the retreat
• Brent held above $105/barrel near multi-month highs on escalating US-Iran tensions
• The US Dollar Index firmed toward 99 and the rand slid to its weakest since late August
BONDS
The US 10-year Treasury yield surged to around 4.95%, up roughly 11 basis points on Thursday and its highest level since 2023, while the rate-sensitive two-year jumped toward 4.53%. The driver is unambiguous: a hotter-than-expected PPI print, with headline PPI at 5.4% year-on-year, compounded by a fresh oil shock that has the market convinced inflation is re-accelerating. Fed-funds futures now imply close to a 70% probability of a rate hike at next week’s Federal Open Market Committee meeting; a remarkable shift from the rate cuts priced in just weeks ago.
The German 10-year bund yield climbed to around 3.50%, its highest level since 2011, after the ECB delivered a second-rate hike and energy prices intensified the inflation impulse across the eurozone. European gas prices at multi-year highs, combined with Brent above $105/barrel, have hardened expectations for further ECB tightening into 2027.
The United Kingdom’s (UK’s) gilts are at a 19-year high, with the 10-year yield at roughly 5.33%, a level not seen since 2007. The UK’s acute sensitivity to imported energy costs, with natural gas prices at their highest level since 2022, has left the market pricing further Bank of England (BoE) hikes despite an already fragile growth backdrop. The gilt-bund spread, near two full percentage points, underscores the risk premium investors are demanding to hold UK debt.
The 10-year South African Government Bond (SAGB) yield edged up to around 8.88%, a modest three-basis-point rise but part of a 30-basis point climb over the month as the global inflation scare washes into local markets. The transmission channel for South Africa is particularly direct. Higher Brent prices feed straight into domestic fuel prices, threatening the inflation progress that saw CPI ease to 4.3% in July. With the repo rate at 7%, the market is now contemplating the possibility of a 25-basis point SARB hike at the September Monetary Policy Committee meeting, though the SARB has signalled it will move cautiously given a second quarter GDP contraction and weak mining output. SAGB yields therefore sit at the intersection of global rate repricing and unique domestic fragility.
EQUITIES
The S&P 500 closed near 7,592 on Thursday, down about 0.6% and extending its losing streak to a fourth session; the Dow shed roughly 320 points, 0.6%, to around 52,050, and the Nasdaq Composite ended near 26,080, down 0.65%, with the tech-heavy internals materially weaker. The pain was concentrated in semiconductors – Micron fell nearly 5%, Intel over 5%, and Nvidia and AMD both dropped more than 2% – as higher yields hit long-duration growth names hardest. Apple was a rare bright spot, jumping around 3.6% on new product announcements. The broader message is that rising energy costs and financing rates are being read as a squeeze on both corporate margins and equity valuations, a headwind that today’s US CPI print could either ease or intensify.
The Euro Stoxx 50 finished essentially flat at around 6,308, masking a sharp rotation beneath the surface. Banks outperformed – Société Générale and Deutsche Bank both rose over 1% – as the steeper yield environment and the ECB’s hiking cycle improve net-interest-margin prospects, while rate-sensitive technology lagged, with ASML down more than 1%. Germany’s DAX fell 0.75% and the French CAC 40 dropped 0.45%, reflecting the same session-wide drift from early gains into negative territory seen across the region.
The UK’s FTSE 100 fell around 0.71% to roughly 14,357, joining the broad European retreat with no obvious safe corner. While the Index’s heavy weighting toward energy majors offers some insulation when oil rallies, that benefit was more than offset by the drag from higher gilt yields on rate-sensitive sectors and by the generally risk-averse tone. The pullback was synchronised with Frankfurt and Paris rather than driven by any UK-specific catalyst, suggesting macro forces – energy, yields and the global inflation scare – are overwhelming domestic stock-level stories.
The JSE All Share Index dropped a notable 1.31% to around 114,993, underperforming most developed peers. The decline was led by gold miners, with AngloGold Ashanti falling nearly 3.7% as the bullion price retreated, compounded by weakness in banks and rand-sensitive stocks. South Africa sits awkwardly in the current global backdrop. It is a net oil importer facing an energy-cost shock, its currency is under pressure, and its two traditional equity anchors, precious-metals miners and rate-sensitive domestics, are both on the back foot.
COMMODITIES
Spot gold tumbled to around $4,320/ounce, a decline of roughly 1.8% on the session, extending a pull-back that has left it down more than 1% on the month and well below January’s record high of near $5,608/ounce. Despite a live geopolitical conflict and equity weakness, conditions that would ordinarily lift bullion, gold has fallen because the markets have priced in higher real rates and the dollar is firmer, both of which raise the opportunity cost of holding a non-yielding asset. For clients, this is a reminder that gold’s safe haven status is conditional. However, it remains up nearly 19% year-on-year.
Brent crude is the epicentre of the current backdrop, trading above $107/barrel in the overnight session after settling near $105/barrel on Thursday, a gain of around 3.6%, with West Texas Intermediate around $102/barrel. The rally – roughly 13% for the week and oil’s sharpest climb since mid-July – is driven by the escalating US-Iran conflict, which includes strikes on tankers and Gulf assets, a sharp fall in Saudi Arabian output, and record tanker rates that raise the possibility of prolonged supply disruption through the Strait of Hormuz. This is a classic supply-side shock and is simultaneously inflationary and growth-negative, which is precisely why it is lifting yields, pressuring equities and complicating every major central bank’s policy path. Any sign of de-escalation in the conflict would be the single most powerful catalyst to reverse the week’s cross-asset moves.
CURRENCIES
The DXY firmed to around 99.09, up about 0.27% on Thursday, rebounding as the market repriced towards a Fed rate hike next week. The greenback is drawing support from two reinforcing sources: better Treasury yields and its traditional safe haven appeal during a geopolitical shock. The rebound is notable given the dollar had drifted lower earlier in the month, and it underscores how quickly the hawkish inflation narrative has reasserted the currency’s upward pull. The DXY’s direction from here hinges squarely on today’s US CPI print.
The euro slipped to around $1.1609/€, down roughly 0.21%, as the dollar’s rate-driven strength outweighed the ECB’s own hawkish turn. The pair is caught in a contest of competing tightening cycles, but with the Fed now flirting with a hike and US yields leading the global move, the near-term differential (who has the higher yields) favours the dollar. The euro’s downside is cushioned, however, by rising bund yields and the ECB’s demonstrated willingness to keep tightening. This means that the euro-dollar exchange rate is more likely to grind than to break decisively, unless today’s US CPI print delivers a genuine surprise.
Sterling eased to about $1.3511/£, down around 0.27%, despite UK gilt yields sitting at 19-year highs. The move illustrates that the dollar’s broad strength is the dominant driver at present. Sterling’s elevated yields are a mixed blessing: they lend the currency a carry advantage (interest rates earned by holding the currency), but they also reflect deep concern about UK inflation and fiscal sustainability, which caps enthusiasm. For British pound-exposed corporate clients, the balance of risks around the dollar-pound exchange rate is unusually two-sided heading into today’s US CPI release and next week’s central-bank calendar.
The rand weakened to around R16.20/$, a fall of nearly 1% on Thursday, and its weakest level since late August, having briefly traded below R16.00/$ earlier in the month. The currency is being hit from multiple directions: a firmer dollar, the oil shock (South Africa is a net energy importer), softer gold, and domestic fragility including a second-quarter GDP contraction and a sharp drop in mining output. The recent range of roughly R15.90/$ to R16.20/$ has given way to the weaker end, and the rand is now highly exposed to the interplay between global risk appetite, the oil price and the SARB’s September policy decision. A hawkish SARB could offer some support, but the external backdrop is the more powerful force.
*Please note that all information is at the time of writing.
Key indicators:
USD/ZAR: 16.17
EUR/ZAR: 18.77
GBP/ZAR: 21.87
BRENT CRUDE: $106.13
GOLD: $4,344.40
Written by Citadel Advisory Partner and Citadel Global Managing Director, Bianca Botes.
Sources: Bloomberg, CNBC, South African Reserve Bank, Statistics South Africa, Yahoo Finance and US Bureau of Labor Statistics.
