Oil rises then falls; Asia-Pacific markets eye US-China summit

Key points:

• Oil prices climbed at the open on Globex during Sunday evening US hours, a move attributed to the Houthi attack on Riyadh, before declining as the market turned to US Central Command's remarks about better oil flows.
• Explosions were reported in Sanaa, with analysts speculating that they could mark a Saudi retaliation for the previous attack on Riyadh. No one has claimed responsibility for the blasts.
• The US Virtual Embassy in Iran has called on American citizens to depart the country at once, cautioning about possible flight cancellations and airspace shutdowns.
• According to the New York Times, President Trump ordered the Pentagon to ready airstrikes against the Houthis but then reversed that decision by Sunday afternoon. Officials stated there would be no US strikes at this time.
• Axios reported that Trump repeatedly urged President Zelensky to halt attacks on Russian oil refineries because they are boosting global diesel costs. The two are scheduled to meet in New York on Tuesday.
• Officials from the US and China described their discussions in New York as productive, ahead of the Trump-Xi summit planned for Thursday.
• Commonwealth Bank of Australia advanced its prediction for a Reserve Bank of Australia rate rise to September 29, while ANZ now forecasts increases in both September and November, alongside Westpac and NAB.
• Minneapolis Fed President Kashkari stated that inflation is excessively high outside of energy, ECB's Stournaras indicated that an October rate hike remains possible, and the PBOC kept its loan prime rates unchanged for a 16th consecutive month.
• Japanese financial markets are closed from today until Wednesday, reopening on Thursday.

In Sunday evening US trading on Globex, crude oil rose at the open, with the Houthi attack on Riyadh being a cited reason. Prices later retreated as market focus moved to US Central Command's statements that oil flows were getting better. Central Command reported that oil and LNG shipments via the Strait of Hormuz in the last two weeks hit a six-month high. In a September 18 note, JPMorgan analysts said Middle East flows are still surprisingly robust despite the damage to Saudi Arabia's East-West pipeline, though they remain around 6 million barrels per day below the 2025 average.

Several reports noted explosions in Sanaa, the Yemeni capital. Analysts said any attacks there would be a major red line for the Houthis (also called Ansarallah), and speculated the blasts might be a Saudi retaliation for the assault on Riyadh two days prior, which reports tied to smoke and trouble at King Khalid International Airport. The cause of the explosions remains unconfirmed.

The US Virtual Embassy in Iran has advised American citizens to depart the country without delay, citing the risk of flight cancellations, airspace closures and other travel problems as tensions mount in the Middle East. The advisory, reported by ANI and Fox News, tells Americans to avoid all travel to Iran. The US has no diplomatic or consular offices in Iran; Switzerland serves as the protecting power.

The New York Times reported that after a call with Saudi Arabia's crown prince, President Trump directed the Pentagon to ready airstrikes against the Houthis but reversed that decision by Sunday noon. Administration officials said there would be no US strikes at this time.

Citing a source, Axios reported that Trump repeatedly asked Ukrainian President Zelensky to cease attacks on Russian oil refineries, as the strikes push global diesel prices higher. This request came after Ukraine's biggest drone assault on the Moscow region, which struck the city's main oil refinery, per Moscow's mayor. The two presidents are scheduled to meet Tuesday in New York, and Ukraine's lead negotiator Rustem Umerov said the number of obstacles in the talks has been narrowed to one or two main issues.

On Sunday in New York, US and Chinese officials held discussions focused on trade and artificial intelligence, which Treasury Secretary Scott Bessent described as successful. Following his meeting with Chinese Vice Premier He Lifeng, Bessent said both sides agreed to hold further talks. US Trade Representative Jamieson Greer stated that the meeting would set the stage for a successful summit between Trump and President Xi on Thursday. China's top trade negotiator, Li, said the talks were not bad and that working-group discussions would resume on Monday.

In currency markets, Commonwealth Bank of Australia moved its forecast for a Reserve Bank of Australia rate hike to September 29 from November, and ANZ now anticipates 25-basis-point increases in September and November. Westpac and National Australia Bank had already predicted a September 29 rise, which would take the cash rate to 4.60% from 4.35%. The Australian dollar held steady with underlying support, while the New Zealand dollar hovered near a two-month low before getting some late backing.

Turning to central banks, Minneapolis Fed President Neel Kashkari said inflation is too elevated throughout the US economy, not just in energy, after last week's quarter-point rate hike to 3.75%-4.00%. He noted that the Fed cannot reopen the Strait of Hormuz or reduce oil prices via interest rates but has tools to address broader price pressures. ECB Governing Council member Yannis Stournaras said policymakers must remain watchful on inflation without acting too quickly, and that an October rate increase cannot be excluded if energy prices or September inflation jump. Markets are pricing a quarter-point increase in the deposit rate to 2.75% next month from 2.50% following the September 16 hike. The People's Bank of China left its one-year loan prime rate at 3.00% and five-year at 3.50% for a 16th straight month, as widely expected. With the PBOC's 7-day reverse repo rate now its main policy rate at 1.4%, analysts said a more hawkish Fed, weak credit demand, and thin bank margins limit scope for easing.

Overall, Asia-Pacific trading began on a mixed note ahead of several key US meetings this week, notably the Trump-Xi summit. Trading volumes are lighter as Japanese markets are shut from today through Wednesday and reopen on Thursday.