Oil, Yields In Focus Amid Geopolitical Uncertainty

Keith Lansford (0:05)

Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead.

I'm Keith Landsford, and here is Schwab's early look at the markets for Tuesday, September 22nd. With little major economic data or earnings news due today, investors will likely remain focused on geopolitical tensions, oil prices and treasury yields. Several Federal Reserve speakers are also set to speak, potentially offering more insights into the path ahead for interest rates following last week's rate hike. All three major market indexes rose Monday, fueled by a surge in AI names and retreating oil prices and treasury yields. Benchmark Brent crude prices sank three and a half percent to just above $100 per barrel amid hopes for diplomacy between the US and Iran. Investors were feeling optimistic after President Trump told Fox News over the weekend that he is in constant communication with Iran and may be open to meeting his Iranian counterpart at the UN General Assembly in New York this week. However, tensions between the two nations are far from quashed. Investors have been repeatedly whipsawed by shifting U.S.-Iran headlines in recent weeks, shifting back and forth from fears of an extended oil supply shock to relief over temporary ceasefires or diplomatic talks. This weekend's headlines exemplified that trend. Despite peace talk hopes, Iran's Islamic Revolutionary Guard Corps threatened Sunday to respond to any new US assault by expanding the geography of the war. President Trump also said he's still deciding whether to strike a deal to end the war, noting in his Fox News interview that he's also considering wiping Iran out or letting them rot economically. Investors are certainly hoping for an end to the conflict, with persistently elevated energy prices threatening to keep inflation and rates higher for longer. Another resurgence in fighting between the US and Iran could worsen the oil supply shock at a time when the market has little buffer against disruptions. The Strategic Petroleum Reserve and Commercial Crude Inventories are both sitting near multi-decade lows. The US. Strategic Petroleum Reserve is well below its historical highs, while diesel sits at the tightest point in the energy complex, said Casey McCurry, Chief Portfolio Strategist at Schwab Wealth Advisory. With less policy cushion and thin distillate inventories, another disruption could travel more quickly through transportation costs, inflation expectations and interest rates. The potential market impacts of geopolitics will also be in focus on Thursday, when President Trump is expected to meet with China's President Xi Jinping at a bilateral summit in Washington, DC. The pair will likely discuss extending their trade truce, potential AI development restrictions and the war with Iran. With oil prices declining Monday, treasure yields fell across most of the curve. The closely watched 10-year note yields slipped below the key 5% level, offering some reprieve for stocks. Higher yields would likely be biting stocks more if it weren't for the fact that multiples have already compressed alongside earnings growth being much stronger than stocks appreciation, said Lizanne Saunders, Chief Investment Strategist at the Schwab Center for Financial Research, noting that the forward price to earnings ratio for the S&P 500 has fallen from around 23 at this time last year to just 19 today.

While markets have largely muddled along in recent weeks, despite rising yields and geopolitical tensions, investors are becoming increasingly pessimistic. This week's American Association of Individual Investors or AAII Sentiment Survey showed 53.3% of investors have a bearish outlook for markets over the next six months. That was up from 39.3% a week ago and well above the 31.5% historical average. Investor sentiment remains a story of what's being said is not what's being done, said Saunders, noting that despite investors' bearish outlook, equity inflows remain strong. Investor sentiment could also be swayed this week by a raft of Fed speakers. New York Fed President John Williams is set to speak at 10:05 a.m. Eastern Time today, followed by Fed Vice Chair Philip Jefferson at 10:20 a.m. Eastern Time and Richmond Fed President Tom Barkin at 1 p.m. Eastern Time. The trio could shed more light on the central bank's outlook for the economy and rates amid elevated inflation. Chicago Fed President Austin Goolsbee already drew attention Monday after saying the Fed may no longer be able to look past ongoing supply shocks given their duration. Goolsbee also warned AI may be raising overall economic output by more than the economy can handle. If demand overheats, there is no ambiguity about how the Fed needs to respond, he said at the official Monetary and Financial Institutions Forum in London.

Treasury auctions may also draw attention this week with investors focused on the impact of higher yields. A two-year note auction is set for today, followed by five and seven-year auctions on Wednesday and Thursday. Strong demand at these auctions could potentially ease some of the pressure on yields, while weak demand could increase that pressure. With yields retreating from their recent highs, Bitcoin surged above $86,000 on Monday, the eight-month high, as some in the industry beginning to believe the quote-unquote crypto winter is finally coming to an end, even after the Senate voted to block the Clarity Act last week. However, the cryptocurrency remains roughly 30 percent below its all-time high.