Hang Seng Falls 2.6% as Refiner Profits Set to Quadruple
Hong Kong took the loss before Europe opened. The Hang Seng fell 2.64% to 23,964 on Friday, with bond yields still high and Brent crude near $102. US refiners are on course for a more than fourfold jump in profits, because diesel and gasoline are doing the work that a flat crude quote is not.
Hong Kong led a soft Asia session
Asian shares were mostly lower as investors weighed the path for US rates. The Nikkei 225 fell 0.90% to 68,338. Crude was not the new shock. Brent eased 0.23% to $102.07, WTI eased 0.37% to $92.53, and US natural gas fell 1.35% to $2.93.
The US 10 year was 5.258%, up 2.4 basis points. The UK 10 year was 5.405%. Japan sat at 3.090%. The euro rose 0.09% to 1.1252, and the dollar bought 157.92 yen. Rates moved. The dollar barely did.
Hong Kong is full of cash flows that sit years out, so a 10 year yield above 5.2% cuts what they are worth today. US shares still rose on Thursday. The S&P 500 gained 0.19% to 7,666 and the Nasdaq 100 gained 0.31% to 30,502.
A 12 basis point dip did not stick
On 29 July the 10 year was 4.6%, and the terminal fed funds rate was priced just over 4%. Highs this week were 5.25% and 4.86%. August core PCE is still 3%, and a trimmed mean that drops the wildest prices is 2.3%. Inflation does not explain a rise of about 65 basis points.
A vague July press conference, a hawkish Jackson Hole speech, and last month’s hike did more of it. The Treasury secretary talked up bond purchases, then called a “fever” in the market and told traders he was the house. Futures priced another hike that has not arrived.
Thursday took some of that back. Fed funds futures for October next year fell 21 basis points, and the 10 year fell 12 basis points from the session high to the low. The deputy chair said another hike may need more time. Early Friday the 10 year was 5.258% again. The dip did not last, and Treasuries still do not look cheap.
France went the other way. The French 10 year rose to 4.92% while bunds rallied. A move above 5% would be the first since 2002, and the gap versus Germany is near the 2011 extreme. The 2027 budget aims to cut the deficit from 5.4% of GDP to 5%, about 54 billion euros or $61 billion, on assumptions the fiscal watchdog called optimistic. The Eurofirst 300 fell 1.21% to 2,504 and the FTSE 100 fell 1.68% to 10,428. European stocks have given back almost all of their gains since this US administration took office.
Emerging markets have held up better, on the view that higher US rates will not drain funding the way they once did. Hong Kong still sold off. The yen funded carry against the Mexican peso has already been a loser.
Refiners get paid on the fuel spread
The profit jump at US refiners is diesel and gasoline, not a fresh leap in crude. Brent near $102 is a costly feedstock, and Friday’s move in the barrel was slightly down. Refiners earn the gap between the crude they buy and the fuel they sell.
The Iran war has already lifted fuel prices. Ukrainian attacks on Russian energy facilities have removed more product supply. On top of that, the US is sending seven more warships and at least 9,000 troops toward the Middle East. The president is weighing a return to strikes on Iran after the November midterms. The ships are underway now. The strike decision can wait. Margins can stay wide on the threat alone.
A producer needs the crude price. A refiner needs fuel to stay expensive against crude. US gas at $2.93 does not fill a diesel gap.
Bank capital and contracted power
Artisan Partners owns 1.8% of UBS and told the board that Switzerland is no longer a good home. The proposed capital rules could force about $16 billion more common equity and cost shareholders as much as $36 billion in market value. The bank wants to stay. It has also looked at leaving, including a base in the US. Equity that has to stay in the bank is a dividend that does not get paid.
Contracted power is a different cash flow. Japan plans $140 billion for AI data centers with Dell and Jera. Constellation Energy and Amazon signed a 20 year nuclear supply agreement. Server orders can pause. A power contract has to keep running. Micron expects fiscal first quarter revenue of $61.5 billion, plus or minus $1.5 billion, and is raising spending for fiscal 2027. Anthropic wants to list before the end of next month, as does OpenAI. Customers are already fighting bills that charge for computing power used, not for the value of the work. The invoice is cash this year. The listing is not a dividend.
What this means for income investors
Equity income has to clear a US 10 year at 5.258% and a UK 10 year at 5.405%. Thursday’s 12 basis point swing did not leave yields lower. One soft day in rate futures does not change the hurdle.
Refiner cash is a fuel spread, not a crude price. Profits can rise more than fourfold with Brent near $102 if diesel and gasoline stay tight, and they fade if that tightness breaks. One quarter is not a new base for the dividend.
A French 10 year at 4.92% means European payouts need a look at the bond market behind them. At UBS, $16 billion of extra equity stays in the bank. A 20 year power contract can sit next to a 5.3% Treasury. An AI listing is not an income stream. EU inflation for September and the US labor figures can still move the 10 year before the weekend.