Wall Street dips as yen, oil gain amid Middle East strife

By Amanda Cooper and Pete Schroeder

LONDON/WASHINGTON, Sept 8 (Reuters) - U.S. stocks fell on Tuesday morning, as attacks on energy facilities around the Gulf pushed oil to near $100 a barrel.

All three major U.S. indices were trading lower after a long holiday weekend, with the Dow Jones Industrial Average dropping 1.21% in the first hour. The S&P 500 dropped 0.49% and the Nasdaq Composite fell 0.52%.  

Brent crude oil spiked 1.32% to $98.28 per barrel, its highest level in six weeks, while U.S. crude rose 2.11% to $93.40 a barrel. The increase came after Yemen's Iranian-backed Houthis attacked energy facilities and cities in Saudi Arabia, highlighting the risk of the conflict spreading throughout the region and further complicating the supply of fuel to world markets.

A resurgence in inflation has knocked the equity market in the past few weeks, in large part because of the surge in bond yields to multi-year highs, which puts central banks under pressure to raise interest rates.

The European Central Bank is all but certain to raise euro zone rates by a quarter point on Thursday this week, while the chances of the Bank of Japan doing the same next week are intensifying, which has set the yen on course for its strongest rally in two years. 

Equity markets in Europe slipped, leaving the STOXX 600 down 0.2%. MSCI's gauge of stocks across the globe was last down 0.49%. 

YEN CARRY TRADES UNWINDING

U.S. inflation data on Friday could prove decisive in setting expectations for the outcome of the Federal Reserve's meeting next week. Right now, money markets show traders are attaching a roughly 58% chance of a rate rise.

Oil stole the spotlight on Tuesday, but the yen's surge may prove the bigger story for global markets. Because of its status as a low-yielding currency, traders have borrowed yen in earnest to fund purchases of higher-yielding assets across currencies, bonds and equities, a strategy known as the carry trade.

In the last week alone, the yen has gained nearly 4%, its largest week-on-week increase since July 2024. On Tuesday, it was trading around 154.1, leaving the dollar roughly unchanged on the day.  

"Despite short-term fundamentals suggesting the move is overdone, it remains risky to stand in its way, particularly given the scope for further carry trade unwinding," ING strategist Francesco Pesole said.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.06% to 98.88. 

In commodities beyond oil, the price of copper hit a record high on Tuesday, as global supply tightened with the metal continuing to flow into the U.S. ahead of possible tariffs.

Three-month copper on the London Metal Exchange was up 1.6% at $14,736 a ton.

On the bond market, benchmark U.S. 10-year Treasury notes were yielding 4.8%, up 2 basis points on the day and not far off their highest since November 2023.

(Additional reporting by Gregor Stuart Hunter in Singapore; Editing by Shri Navaratnam, Alex Richardson and Andrea Ricci )