Oil surges 7% as supply fears grip market

Markets:

• WTI crude oil up $6.67 to $102.72
• Gold down $78 to $4322
• US 10-year yields up 12 bps to 4.95%
• USD leads, AUD lags
• S&P 500 down 0.5%

The market's hidden stress points cracked open on this trading day. Attention had been focused on PPI, but crude became the main event. Trump said on Wednesday that the conflict with Iran would continue past the midterms, sparking a rush for supply and an ninth-straight day of oil buying. The rally hardly paused, sending crude higher by 7% as it broke through $100, reaching $103.06 at its peak and staying only slightly below that level late in the session.

The oil advance was compounded by a somewhat hot PPI reading, which added fresh anxiety ahead of Tuesday's key CPI release. Ahead of that report, the market prices a 70% probability of a Fed rate increase. After CPI, that could drop to 40% or rise to 95%. Alternatively, the focus could shift to the next report, when the recent surge in energy prices is expected to stoke inflation.

The Treasury market left little doubt about the consequences, with yields climbing 8 to 14 basis points across the curve, led by shorter maturities.

The ECB may have reinforced the Fed's hawkish tilt after Lagarde described the rate increase — as anticipated — as an obvious call and noted that growth had come in surprisingly strong. The euro was slow to gain but finished in second place behind the dollar as markets price in another rate increase this year.

The Australian dollar faced heavy pressure as metals prices dropped and risk aversion dominated. Copper quickly fell back from its record high set Wednesday as fears about macroeconomic weakness took hold.