U.S. Indexes closed little changed to lower on Wednesday, with the Russell 2000 leading the losses while the NASDAQ 100 also underperformed ahead of big tech earnings after the close. Equities largely traded sideways throughout the session as investors awaited earnings results from Google (GOOGL), IBM (IBM) and Tesla (TSLA). Sector performance was mixed, with Utilities, Energy and Materials outperforming, while Consumer Discretionary, Communication Services and Health Care lagged. Crude prices settled higher as the US-Iran conflict continued to escalate. Both sides dismissed reports that negotiations were underway, while President Trump warned that if Iran fired at another vessel in the Strait of Hormuz, the US would destroy a bridge or power plant in Iran. Tehran responded by threatening energy and power infrastructure across the region should its own key infrastructure come under attack. Treasuries came under pressure as higher oil prices lifted inflation expectations. The Treasury curve bear flattened as money markets continued to increase expectations for further Fed tightening, with around 35 basis points of hikes now priced by year-end. In FX, firmer crude prices supported the Canadian Dollar, while the Dollar Index was little changed overall. The Japanese Yen briefly strengthened after reports suggested the Bank of Japan would be willing to tighten policy more frequently than once every six months, although those gains ultimately faded. Precious metals were firmer despite rising Treasury yields and inflation expectations, likely reflecting continued haven demand amid elevated geopolitical uncertainty. There were also reports that the Trump administration is considering military options in Mali, whose largest export is gold. The increasingly escalatory rhetoric pushed crude prices higher, with WTI climbing back above USD 86/bbl and Brent above USD 93/bbl. Similar to Tuesday, the rise in oil prices fuelled inflation concerns and prompted money markets to increase expectations for further Fed tightening. Around 8.5 basis points of tightening are now priced for next week’s FOMC meeting, implying roughly a 34% probability of a 25bp hike. By year-end, markets price around 35bps of cumulative tightening, fully pricing one rate hike with around a 40% probability of a second. Elsewhere, the USD 13 billion 20-year Treasury auction was soft, with the issue tailing by 0.5bps and dealers left with a larger-than-average allocation. The results suggest the renewed geopolitical tensions may have tempered investor appetite for duration despite the 20-year yield trading at its highest level since May.
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