Analyst warns of 'late-stage bubble' as rates and oil prices surge

Surging oil prices have reignited inflation fears, sending global bond yields to multi-year highs and Australia's share market slumping on Friday.

Brent crude futures hit a four-month high of $US109.97 a barrel, as fresh attacks on key shipping routes in the Middle East and Yemen's Houthi attacks on Saudi oil facilities raised fears of spreading conflict in the region.

While crude prices edged back off that peak, at $US107.86 a barrel by mid-afternoon AEST, they are still at their highest point since mid-May, before the US and Iran agreed on an uneasy ceasefire, which has since expired.

The US benchmark West Texas Intermediate (WTI) crude price is also around multi-month highs at $US103.57 a barrel.

"With events spiralling and Iran showing it is willing to stretch this conflict as wide and as long as it can, it is becoming increasingly likely that WTI crude will retest the $US119.48 high from early March," IG analyst Tony Sycamore told Reuters.

Investors are bracing for more aggressive interest rate hikes worldwide as central banks try to manage another wave of inflation.

The European Central Bank (ECB) lifted rates by 25 basis points overnight, to 2.5 per cent, and revised its inflation forecasts higher for 2027 and 2028.

The Bank of Japan (BOJ) is expected to lift rates by 25 basis points next week, which would result in its policy rate rising to 1.25 per cent, its highest level in 31 years.

There are growing market fears the US Federal Reserve will also lift interest rates when it meets next week, ignoring US President Donald Trump's demands for lower rates.

In Australia, the RBA's Monetary Policy Board will meet on September 28 and 29, and market pricing suggests there is a 70 per cent chance that the RBA will lift rates when the meeting concludes.

Analysts say recent data in Australia have shown that inflation and economic activity are both running hotter than expected in the economic cycle, and senior RBA officials have acknowledged how angry people are about inflation.

India's 10-year government bond yields hit 7.0038% on Friday in response to rising oil prices.

Bond sell-off rattles global markets

The threat that higher oil prices pose to inflation over the short and medium term, along with longer-term concerns about government finances across many major Western economies, has resulted in bond prices falling and the yield, or interest rate, on bonds surging to multi-year highs this month.

The yield on US 10-year Treasuries jumped to 4.97 per cent during early Asian trade on Friday, the highest level in almost three years.

Reuters reports that 10-year yields broke above 5 per cent in October 2023 for the first time since 2007, reaching 5.021 per cent, but only for one day.

Some analysts have expressed concerns that a sustained rise above 5 per cent for US 10-year Treasuries, the world's benchmark "risk-free" financial instrument, could wreak havoc on asset markets and the global economy.

"Rising interest rates have a habit of ending booms. They did it in 1987, they did it 1994, they did in 2000, they did it in 2008," financial commentator and former banker Satyajit Das told the ABC Business Daily podcast on Monday.

"There's a whole generation really, who have never seen interest rates this high."

His concern is shared by many other analysts.

"While we aren't convinced that 5 per cent is the 'magic' number, higher Treasury yields would certainly pose a risk to the sustainability of the US public finances as well as threaten equities," said John Higgins, the chief economic adviser for financial markets at Capital Economics.

Mr Das said there was a collision of inflationary pressures stemming from the Iran and Ukraine wars, El Niño weather conditions, massive artificial intelligence investments, and large budget deficits across most Western nations.

"The US budget deficit is 6 per cent and the average fiscal deficit in the OECD countries is just under 5 per cent," he said.

"So, essentially, there's this massive supply of debt from governments coming [in the future] at the same time as these inflationary pressures.

"All of these pressures mean that interest rates aren't likely to go down anytime soon."

Oil surge, bond sell-off have 'muted' impact on ASX, Wall Street

Rising bond interest rates normally translate to falling share prices. Australia's share market was down more than 1 per cent on Friday after a 0.6 per cent fall overnight for Wall Street's benchmark S&P 500 index.

"Government rates are the bedrock of all cost of borrowing, all capital costs within the economy," Mr Das said.

"So what you're going to find is households and businesses will have to cut back spending and investment, and the overstretched will slide into financial distress and that'll inflict losses on banks and private lenders."

However, while the benchmark S&P 500 share index [in the US] fell for a fourth straight session on Thursday, NAB's head of markets research Skye Masters said the response was "muted" given the moves in other asset classes.

"It's been an ugly session for markets overnight," she wrote on Friday.

"Stock market losses were relatively contained given the magnitude of moves in oil and rates."

The sell-off was steeper in Japan as investors braced for a domestic rate hike next week, pushing the Nikkei down more than 2 per cent in afternoon trade.

Renowned investor Mohamed El-Erian, who used to run giant global bond investment firm PIMCO, was also impressed by the resilience of US shares to the jump in bond yields, so far.

"Impressive corporate earnings have provided vital insulation for the stock market, alongside the remarkably limited spillover—so far—from interest rate risk to credit risk," he wrote on X.

"How this evolves will largely depend on whether higher yields weaken the economy, reduce financing availability, and/or trigger pockets of de-leveraging."

Wall Street in 'late-stage bubble', warns analyst

While share values in the US and Australia have been relatively resilient to the latest jump in oil prices and key interest rates so far, some analysts are warning that will not last.

"On balance, we think the data look consistent with a late-stage bubble," James Reilly, a senior markets economist with Capital Economics, wrote in a research note.

He listed eight indicators that point to the S&P 500 being in the middle or later stages of a bubble, including a dramatic escalation of debt-funded investment by the so-called AI hyperscalers, as well as a "wave" of share sales and initial public offerings as that sector looks to cash in on high valuations.

"On past form, this suggests that the end of the bubble is just months away, rather than years,"