It's a Strait Standoff
August showcased how rapidly news flow can shift global markets and sentiment, with energy markets whipsawed by the Strait of Hormuz back-and-forth. The U.S.'s economic blockade of Iran, recurring attacks on commercial vessels, and reports that the U.S. dredged an alternative shipping route free from Iranian interference all affected energy prices throughout the month. All this was happening while investors maintained hope for a revival of the previous diplomatic agreement between the two nations.
Alas, any optimism proved premature. Dousing hopes for a cessation to the fighting, the U.S. struck missile sites on Larak Island, and Iran retaliated by attacking American military bases in the region. Tanker traffic through the Strait of Hormuz remained below levels seen at the start of July, and oil prices have spent more time close to the symbolically important $90/bbl level than the pre-war sub-$70/bbl level. In the background, the world continues to draw down inventory of refined products, putting pressure on gasoline and diesel prices.
And the Iran conflict isn't even the only geopolitical issue impacting commodities. The Russia-Ukraine war continues to disrupt the refined product space as Russian refiners face Ukrainian attacks. Meanwhile, severe weather and fears of disruption in the Black Sea have pushed crop prices like wheat to multi-year highs. Combine high geopolitical tensions with the resource-intensive global effort to build out AI capacity, and you have the perfect storm for volatility and heightened uncertainty around commodity prices.
Buybacks & Debasement
The strength in commodities also drew support from the “Sell America” trade we've seen the last two years. The national debt formally crossed $40 trillion, leaving bond investors increasingly concerned about debt sustainability and persistent deficits. The higher risk drove the 30-year U.S. Treasury yield past 5.3%, its highest level since 2007.
In an attempt to stabilize the long-end of the Treasury curve and reduce long-term borrowing costs, the U.S. Treasury announced it was increasing bond buybacks from $2 billion to $4 billion per operation, and implied it could go even higher. To do this, the Treasury announced it would increase short-term T-bill issuance. Markets interpreted this action as a signal of potential debt monetization and fiscal dominance. (i.e. By buying the government's debt, the central bank facilitates spending beyond the government's means.)
Consequently, investors favored assets that could act as a hedge against the risk of currency depreciation, inflation, and structural fiscal deficits. These included agricultural products, energy, precious and industrial metals, as well as crypto.
Asset performance over the last month bears this out. Materials and Energy were top-performing sectors in the S&P 500, while commodities, gold, bitcoin and ethereum comfortably outperformed.
Market Recap
Macro
• In a much anticipated speech at Jackson Hole, Federal Reserve Chairman Kevin Warsh reaffirmed the Fed's 2% inflation target and that the data had not been good enough.
• The U.S. Treasury Department announced an increase in bond buybacks from $2 billion to at least $4 trillion, funded by an increase in short-term Treasury Bills.
• Though the unemployment rate declined to 4.1% in July, job growth unexpectedly declined by 23k.
• July consumer price data was in-line with consensus estimates, with headline CPI rising by 0.1% m/m and 3.4% y/y.
• Gold prices surged by as much as 15.1% in August ($4,657/ozt), before closing the month up 9.7% ($4,437/ozt).
• A broad basket of commodities rose 7.4%, powered by fears of currency debasement and geopolitical tensions.
Equities
• Large-cap stocks outperformed small-cap stocks by 1.6 percentage points, while Growth stocks outperformed Value stocks by 1.1 percentage points.
• Energy and Material stocks rose 7.0% and 6.0%, respectively, boosted by supply disruptions and dollar weakness.
• The VIX Index fell below 15 for the first time since December 2025.
Fixed Income
• Though the 2y-10y Treasury yield curve spread narrowed from 44 to 41 basis points in August, it widened to as much as 54 basis points on August 17.
• 1-year inflation expectations rose from 1.92% to 2.37%.
• While High Yield bond spreads narrowed from 2.79% to 2.61%, Investment Grade spreads began and ended the month at 0.78%.
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