• Oil prices continue to rise as tight supply kicks in

• Rising bond yields put pressure on equity markets

• Dollar rally takes a breather, helping to boost gold

A pivotal week for global markets kicks off with another sharp spike in oil prices. The non-stop rally has seen WTI crude prices rise more than 30% this quarter, driven by a classic supply shortage after Saudi Arabia and Russia decided to curtail their production.

What’s striking is that this relentless oil price rally has taken place even amid concerns about lower demand from Europe and China as those economies grapple with a severe slowdown, which demonstrates just how tight the supply side of the equation has become. The fact that oil rallied on Friday despite the risk-off tone in equity markets adds credence to this notion.

Rising oil prices have repercussions far beyond energy markets, as they simultaneously squeeze consumers and stoke inflationary pressures. In turn this complicates life for central banks that are now faced with the risk of persistently high inflation heading into an economic slowdown.

In the markets, soaring oil prices translate into bad news for the currencies of energy-importing economies, most notably the Eurozone and Japan, initially through the trade channel and then by dampening economic growth. Hence, the evolution of energy prices will be crucial for the euro and yen, which are already on the ropes.

Shares on Wall Street lost ground on Friday, with the tech sector leading the decline. Some analysts attribute the selloff to the massive option expirations last week, although the steady march higher in bond yields probably played a role too.

It seems stock markets have started to feel the heat of rising yields, as last week marked a rotation away from tech shares and towards value-oriented stocks, which is typical in a regime of elevated yields. And this pressure is unlikely to relent considering that 10-year US Treasury yields briefly hit their highest levels since 2007 earlier today, courtesy of rising energy prices.

All told, the astonishing rally in stock markets this year appears to be losing steam and could unwind further. Valuations remain historically expensive, leaving Wall Street vulnerable in case bond yields fire up any further. Earnings have fallen for three quarters now and the question is whether they are going to reaccelerate in Q4 as analysts project, despite the slowdown in global growth that business surveys warn is imminent.

Over in the FX arena, the dollar took a small step back on Friday and remains on the defensive today. With US yields reaching new cycle highs and equity markets on the retreat, it is surprising that the dollar could not move higher.

There might be an element of caution creeping in ahead of the FOMC decision on Wednesday, keeping dollar traders on guard. Beyond the Fed, there are also central bank meetings in the United Kingdom, Switzerland, and Japan on the agenda. Hence, it will be a week packed with volatility.

Finally, gold prices staged an impressive recovery on Friday, bouncing back to erase all the losses from earlier in the week and trade even higher. The fact that bullion managed to close higher on a week when the US dollar and Treasury yields climbed is a victory in itself and suggests there’s ‘real’ demand for gold under the surface, most likely due to central banks raising their reserves.

Underscoring this point is that gold is trading less than 8% away from record highs, even with yields breaking to new cycle highs. Hence, bullion is displaying relative resilience, although that is not enough to turn the outlook positive. For that to happen, the economic landscape would need to shift so that markets panic about a recession and there’s speculation of Fed rate cuts, which is not on the horizon yet.