Westpac Morning Report - FJElite

Markets settled on Friday as investors responded to reports that Pakistan and Iran were exploring options to enter new peace talks with the US. alongside reports that oil was still able to flow out of the Middle East. Brent crude prices retreated from US$100 a barrel, falling 4%. its biggest one- day drop since late June.

Over the weekend, reports suggested the US paused strikes against Iran for a second consecutive night as tensions continued to escalate in the Red Sea following clashes involving Yemen’s Houthi militants and Saudi Arabia.

The Houthis claimed responsibility for missile and drone attacks on Saudi Aramco-linked facilities in Jizan and Yanbu, prompting retaliatory strikes by a Saudi-led coalition. US equity markets were mixed. The S&P 500 finished broadly unchanged, while the Dow Jones Industrial Average rose 0.4% and the tech-heavy Nasdaq fell 0.6%. Market volatility eased, with the VIX Index falling 0.6% to 18.6. Over the week, however, key US equity indices were lower, with the S&P 500 and Dow Jones Industrial Average falling 0.6% and 0.4%. respectively, while the Nasdaq underperformed, falling 2.1%.

European equities outperformed, supported by lower oil prices and stronger-than-expected PMI results. The Euro Stoxx 50 rose 1.1%. Germany's DAX gained 1.4% and the FTSE 100 increased 0.9%. In Asia, equities were weaker, with the Nikkei falling 2.7% and the Hang Seng declining 1.0%. Locally, the S&P/ASX 200 fell 0.8% to 8.772. SPI futures were up 0.6%, pointing to a firmer open for the Aussie market.

Bond markets rallied modestly on the back of the falls in oil prices. In the US. the 2-year Treasury yield fell 2bps to 4.33%. while the 10-year Treasury yield declined 2bps to 4.68%. Traders are now pricing in roughly a 38% chance of a rate hike at this week's Federal Reserve meeting, up from just 13% a week ago. European yields also moved lower, with German 10-year Bund yields falling 3bps to 3.17% and UK 10-year gilt yields down 7bps to 5.03%. Japanese 10- year government bond yields rose 3bps to 2.82%.