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The big picture: overnight & what matters in today's session

A bond-market sell-off, not the war itself, is what hit equities overnight

• What happened. The US struck Iranian military targets around the Strait of Hormuz for a second time in three days, after Iran was seen preparing to lay sea mines & a supertanker hit suspected mines on Monday. Brent settled up 4.6% at about $94.65 on Tuesday & is trading at $95.34 this morning; WTI closed above $90 for the first time in over a month. The S&P 500 fell 0.71% to 7,631, the Dow 0.79% to 52,767 & the Nasdaq 1.03% to 26,100.
• The mechanism, in plain language. Higher oil feeds inflation expectations; higher inflation expectations raise the odds that the Federal Reserve raises rates rather than cuts them; & that repricing is what pushed the US 10-year yield to 4.81%, its highest since late 2023. Fed funds futures now price a 66-68% probability of a 25 basis point HIKE at the 15-16 September meeting, against roughly 40% a week ago. That is why high-growth technology shares, whose value depends most on distant cash flows, fell hardest, while defensive shares barely moved.
• Asia this morning. Japan's Nikkei is down 2.8-2.9%, Korea's Kospi 3.1% (Korea Exchange triggered a sidecar halt on programme selling), Australia 1.1-1.4%, Hong Kong about 1% & Shanghai 0.8%. Japan's 10-year JGB yield touched 3% for the first time since 1996. GIFT Nifty futures sit at 24,027-24,038, about 30-65 points below Tuesday's Nifty close, so the opening is likely lower but not dramatically so.
• India's own position. The Nifty closed Tuesday at 24,055.80 (-0.10%) & the Sensex at 76,944.28 (-0.02%), but that headline flatness hid a 1.39% fall in the Nifty Midcap 100 & a 1.06% fall in Nifty Bank. Provisional data show FPIs sold Rs. 1,143 crore of cash equities & domestic institutions bought Rs. 1,847 crore. The rupee, unusually, strengthened to 94.95 per dollar, an eight-week high, helped by RBI dollar sales & inflows linked to NIIF.
• What should matter today. Three things: (1) the oil price, because it moves oil marketing companies, aviation, paints & tyres one way & ONGC, Oil India & Reliance the other; (2) the India 10-year yield at 6.96%, because the combination of 7.8% GDP growth, higher oil & a possible Fed hike is reviving talk of an RBI hike at the 5-7 October meeting, which pressures NBFCs & rate-sensitive sectors; & (3) whether Tuesday's mid-cap sell-off extends. The 24,100 level on the Nifty is where derivatives traders see resistance; 23,950 is Tuesday's low.

Global & overnight markets

Wall Street: technology led the fall as the 10-year yield reached 4.81%; Dell & Palo Alto reported after hours

• The close. S&P 500 7,631.47 (-0.71%), Dow 52,766.88 (-0.79%), Nasdaq Composite 26,099.77 (-1.03%), Russell 2000 -1.2%. The high-beta basket fell 2.1% against 0.2% for low-volatility shares, the signature of a rates-driven sell-off rather than an earnings one. Worst S&P performers: Axon, CrowdStrike, Palo Alto, Tesla & Nvidia. Gainers: Moderna, Apple (after Tim Cook moved to executive chairman with John Ternus as CEO) & Exxon.
• Rates & the Fed. The 10-year closed near 4.79-4.80% & is 4.81% this morning, the 2-year 4.41%, the 30-year 5.24-5.28% depending on the source. The trigger for the hike repricing was Fed chair Warsh's Jackson Hole speech on 28 August; July PCE inflation was 3.7% year-on-year against a 3.75% upper-bound funds rate, so real policy rates are close to zero, which is the hawks' argument. This is the first time in this cycle that a hike, not a cut, is the base case.
• Data. ISM manufacturing for August came in at 54.6 against 55.6 in July & 55.2 expected: still expanding for an eighth month, but new orders slowed to 53.7 from 56.7 & backlogs to 51.8 from 55.0, while the prices-paid index stayed at 71.1. ISM says 54.6 is consistent with about 2.4% annualised GDP growth. The Iran war featured in 30% of negative respondent comments. July job openings were 7.3 million, little changed.
• After hours. Dell rose sharply on record quarterly revenue of $47 billion (+58%), $60.9 billion of AI-server orders, a $95 billion backlog & raised guidance. Palo Alto Networks reported revenue of $3.41 billion (+34%) & next-generation security ARR of $9.1 billion (+63%) but the shares fell. Broadcom, HPE & Snowflake report tonight.

Asia: Korea & Japan down about 3%, Japan's 10-year yield at 3% for the first time since 1996

• Levels. Nikkei about 64,400 (-2.8 to -2.9% from Tuesday's 66,215 close), Kospi about -3% (a sidecar curb on programme selling was triggered, the third time this year), Hang Seng about -1% at a five-week low, Shanghai -0.8%, ASX 200 -1.1% to -1.4% with materials down 3% & energy the only sector up. Korea's Kospi is a heavily semiconductor-weighted index, so it takes the full force of a US technology sell-off; it had risen on August exports of $98.25 billion (+68.7%) with chip exports of $46.65 billion (+209%).
• Bond stress. Japan's 10-year JGB touched 3.0% for the first time since 1996 as traders bet the Bank of Japan hikes in September to defend the yen; Australia's 10-year hit 5.19%, the highest since 2011, after Q2 GDP of +0.4% quarter-on-quarter & +2.1% year-on-year. The dollar index sits near 99.7, a two-week high.
• Europe. Eurozone flash inflation for August jumped to 3.3% from 2.9%, the highest since September 2023, with energy inflation of 14.3% doing the damage; core inflation actually eased to 2.4%. Spain 4.5%, Italy 3.2%, Germany 2.9%, France 2.7%. That complicates the ECB's position in the same way oil complicates the Fed's.
• China. The private RatingDog manufacturing PMI rose to 51.5 from 50.9 with new orders up for a fifteenth month, while the official NBS PMI stayed in contraction at 49.8 (49.2 previously). Two surveys, two samples: the private one skews to exporters, the official one to large state firms.

Iran: what actually happened between Sunday & this morning

• Sequence. Sunday-Monday: US Central Command struck two IRGC rocket launchers on Larak Island after Iran was seen preparing to launch sea mines into Hormuz, the first direct combat in about a month; Iran fired at Gulf states & a US base in Jordan. Monday: a supertanker struck suspected mines & caught fire, the third tanker hit in a week. Tuesday: a new round of US strikes on IRGC sites along the Hormuz coast, Gulf islands & Jiroft airport; Iran fired at Jordan (ten projectiles intercepted) & a base in Bahrain early Wednesday.
• Economic pressure. Treasury Secretary Bessent cut Banque Misr's UAE arm off from US correspondent banking (about $1.8 billion processed for suspected Iranian networks) & said another bank sanction comes this week; the US naval blockade of Iranian ports continues. Bessent also noted 17 million barrels transited Hormuz on Monday, so the strait is not closed to all traffic. The earlier ceasefire memorandum has collapsed; Iran's president says Tehran would return to it if Washington does.
• The implication for India. Every $10 on Brent adds roughly 0.3-0.4 percentage points to India's current-account deficit as a share of GDP & feeds through to fuel inflation with a lag, which is why the bond market moved before the equity market did. The rupee's strength on Tuesday was an RBI decision, not a market verdict.

Macro

India manufacturing PMI: 52.8 in August, the weakest since August 2021, & factories cut jobs for the first time in 2.5 years

• The numbers & the trend. The HSBC India manufacturing PMI fell to 52.8 in August from 53.5 in July, the third straight decline & below the long-run average of 54.2, though still the 59th consecutive month above 50 (50 separates expansion from contraction). Sub-indices: new orders & output grew at the weakest pace in five years; employment contracted for the first time in 2.5 years; input-cost inflation was a six-month low & output-price inflation a 45-month low.
• Why. Survey respondents cited softer demand, competitive pricing & caution about the West Asia conflict. The falling output-price index is the useful part for policy: manufacturers are not passing on costs, which keeps core inflation contained even as oil rises.
• Reconciling with 7.8% GDP. The PMI is a diffusion survey of about 400 firms measuring breadth of change month-on-month; GDP is a quarterly value measure. Manufacturing GVA grew 9.2% in the June quarter partly because falling input prices lifted real (volume) growth, a point made in the Datanomics column in the same daily. The PMI is telling us that momentum has faded since June; GDP is telling us where the level was. Both can be true.

GST at Rs. 1.99 lakh crore in August: +14.8% gross, but net growth only 8.3% as refunds jumped 68%

• The numbers. Gross collections Rs. 1,99,853 crore (+14.8% year-on-year); domestic Rs. 1.37 lakh crore (+9.3%); import GST Rs. 62,604 crore (+29%, inflated by the higher rupee cost of oil imports); refunds Rs. 31,795 crore (+68%); net Rs. 1.68 lakh crore (+8.3%). April-August gross Rs. 10.43 lakh crore (+11%), net Rs. 8.89 lakh crore (+9%).
• Reading it. The gross number flatters; the net number, after refunds, is what the exchequer keeps & it is growing at about the rate of nominal GDP (10.3% in Q1). Faster refunds are a deliberate policy to release exporters' working capital. The fiscal deficit reached 26.8% of the FY27 target by end-July, comfortable for this point of the year.

Q1 FY27 GDP at 7.8% (released Sunday 31 August): investment-led, with services at 10% & agriculture the soft spot

• The numbers & the trend. Real GDP grew 7.8% against 6.9% a year ago & the RBI's 7.0% estimate; Q4 FY26 was revised up to 8.6% (from 7.8%) & FY26 to 7.8%. Nominal GDP grew 10.3%. Gross value added grew 8.2% real. Sector: manufacturing +9.2%, services +10.0% (third straight double-digit quarter), financial & real estate +12.1%, construction +7.7%, agriculture +3.6% (4.4% a year ago, on a delayed monsoon). Demand: fixed investment +11.9%, private consumption +7.1%, government spending +4.3%, exports +12%, imports -1.1%.
• What changed because of it. The bond market: a 7.8% economy with oil at $95 gives the RBI no reason to cut & some reason to consider a hike at the 5-7 October meeting; the 10-year yield moved to 6.96% partly on this. At least one brokerage (SBI Caps) now argues for a hike in FY27. The rupee's position also improves because the import figure fell while exports rose.
• The caveat. GVA growth of 8.2% is below GDP growth of 7.8% plus net taxes; the gap between the two comes from subsidies growing slower than indirect taxes. Agriculture at 3.6% & the PMI's weak August suggest the June quarter may be the high point of this run.

US ISM & Eurozone inflation: the two overseas releases that moved rates

• US ISM manufacturing (August, released 1 September). 54.6 from 55.6; new orders 53.7 from 56.7; production 58.3; employment 51.2 from 52.8; prices paid 71.1, unchanged & elevated. Consistent with about 2.4% annualised growth; not a recession signal, but the combination of slowing orders & sticky prices is the stagflation-lite mix the Fed dislikes.
• Eurozone flash HICP (August, released 1 September). 3.3% from 2.9%, the highest since September 2023; energy 14.3%; core 2.4% (2.5% previously). Energy is the entire story, which is why the ECB may look through it while the bond market does not.
• Next on the calendar. Today: US ADP private payrolls (consensus about 48,000), US factory orders, the Fed's Beige Book, Bank of Canada & RBNZ decisions. Thursday: India services & composite PMI for August, global services PMIs, US ISM services. Friday: US non-farm payrolls for August (July was -23,000), the last jobs report before the 16 September FOMC. India: FADA August registrations around 5-8 September; RBI policy 5-7 October.