Oil prices start week higher on supply concerns, but Brent trades a wide range, easing back after hitting USD110 overnight. US 10-year Treasury yield breaks above 5% but falls back quickly. US equities modestly weaker

Volatility in oil prices has made trading conditions choppy at the start of the week. The US 10-year rate briefly surged through the 5% mark before retracing its move. The NZD continues to underperform, breaking below 0.5760 overnight before recovering somewhat.

Oil prices opened the Asian trading session on a stronger note, driven by supply concerns after Saudi Arabia closed its East-West pipeline due to ongoing attacks. The pipeline has been used to divert oil away from the Strait of Hormuz and has capacity of about 7 million barrels per day. Associated Press reported that it will be out of service for several weeks.

Overnight, Brent crude almost reached USD110 per barrel before falling below USD105. President Trump posted on social media that Ukraine and Russia had agreed not to hit energy targets, which had been another source of upward pressure on energy prices. There has been no public confirmation from Russia or Ukraine on whether these strikes will end. Trump has also been active on social media on other fronts, including saying he was open to engaging with Iran on a deal.

The US 10-year rate hit an overnight high of 5.01% following the surge in oil prices. A combination of lower oil prices and buyers rushing to take advantage of more attractive yields sent the yield sharply lower, and it currently trades at 4.96%, little changed from the NZ close. The last time the yield breached 5%, in October 2023, it closed the day below that level. Some technical analysts will be wondering whether the same will be true this cycle. Those focused on more fundamental forces, such as inflation, policy tightening and the fiscal trajectory, will probably be less inclined to believe the peak has already been reached. A Fed rate hike later this week is nearly fully priced, with short-end rates consistent with this being the start of a series of tightenings, extending well into next year.

The economic data flow has been light, but Canada’s CPI figures were in line with expectations. The annual headline increase for August was steady at 3.0%, while the core measure, averaging the median and trimmed mean, was steady at 1.95%. Unlike in many other developed countries, Canada’s underlying inflation looks well contained. Even so, the market continues to see a high chance that the Bank of Canada will need to tighten policy after a long hiatus, with four hikes priced over the next five meetings.

In the equity market, the buzz has centred on the future of humanity if AI development remains unchecked, following Anthropic’s CEO calling for a slowdown and that call finding support among some of his peers. The weekend news weighed on AI-related stocks in Asian trading, particularly semiconductor stocks. In the US, the SOX index is down 5%, but there has been little spillover into the broader market. After the Nasdaq and S&P futures traded heavily in Asia and the cash market opened on a weak note, a recovery ensued. The Nasdaq and S&P 500 currently show only modest falls. President Trump also posted on social media on this topic, playing down concerns, outlining his opposition to regulating AI development, and arguing that China certainly would not do so.

In the currency market, after two consecutive weeks at the bottom of the leaderboard, the NZD has started a third week in the same position, following the RBNZ’s MPS, which showed little intent to get on top of New Zealand’s inflation problem. While the RBNZ’s easy policy stance can take most of the blame, the USD is also broadly stronger, adding to NZD weakness. The NZD traded at a fresh two-month low below 0.5760 overnight before recovering to 0.5785.

The AUD is modestly weaker at 0.7145, while NZD/AUD has been relatively steady overnight, just below 0.81. NZD/JPY has been probing fresh 2026 lows, although it found some support just above 89.

The domestic rates market was calmer yesterday, following Friday’s unhinged session. The sharp selloff in rates at the end of last week attracted some receivers back to the market, helping soak up any lingering pay-side pressure. Swap rates closed the session down 1–2bps, while NZGB yields fell 1–3bps across the curve. There was little reaction to the performance of services index, which continued its incremental upward trend and remained consistent with modest growth in the sector.

On the economic calendar, there are a few bits and pieces, but the key events come later in the week. NZ card spending and China activity data for August are released today, followed by UK labour market data tonight.

Jason Wong is the senior Markets Strategist at BNZ Markets.