Stocks and government bonds declined after renewed US strikes on Iran led to a jump in oil prices and increased speculation about Federal Reserve interest-rate hikes. Brent crude surged 4.7% to $79.55 a barrel, with West Texas Intermediate crude rising 4.6% to $74.72 a barrel, due to conflicting reports regarding the status of the Strait of Hormuz and potential supply disruptions. This push in oil prices fueled concerns that inflation would be rekindled, leading traders to price in almost 40 basis points of Fed rate hikes by December, up from about 15 basis points in early June. The two-year Treasury note's yield climbed to its highest level since February 2025, reaching 4.2393%.
The dollar, considered a safe haven, strengthened against its Group-of-10 peers, supported by higher oil prices which could lead to tighter monetary policy to cool inflation. Conversely, non-yielding precious metals like gold and silver dropped. The US being a net oil exporter also contributed to the dollar's strength. MSCI’s gauge of Asia Pacific shares fell 1.9%, with South Korea’s Kospi sliding over 8%. SK Hynix Inc. saw its shares plunge 13% in Seoul, after its US-listed American depositary receipts had surged 13% on their Friday trading debut. Futures contracts for the Nasdaq 100 Index retreated 1.3%, and European shares were set to drop about 1% at the open.
Investors are now focusing on a pivotal week, with the start of earnings season testing whether companies can sustain profit growth to support the AI-fueled market rally. US inflation data and Fed Chair Kevin Warsh’s congressional testimony will offer additional insights into the interest rates outlook. Julia Wang, chief investment officer for North Asia at Nomura International Wealth Management, stated, “We are expecting July to be a choppy month for equities, particularly due to inflation, rate-hike worries.” She added that the eruption of fighting in Iran would further compound the challenge. Damien McColough, head of fixed income research at Westpac Banking Corp., noted that the re-escalation in the Gulf highlights the high uncertainty over the resolution and its timing in the Strait of Hormuz.
