Stocks and government bonds declined globally, with Brent crude jumping 4.7% to $79.55 a barrel and West Texas Intermediate crude rising 4.6% to $74.72 a barrel, after renewed US strikes on Iran raised concerns about supply disruptions in the Strait of Hormuz. The escalation in the Middle East has reignited fears that higher oil prices will fuel inflation, leading traders to anticipate more aggressive interest rate hikes from the Federal Reserve; swaps are now pricing in almost 40 basis points of Fed rate hikes by December, up from about 15 basis points in early June.
Technology stocks were particularly affected, with MSCI’s gauge of Asia Pacific shares falling 1.9% and South Korea’s Kospi sliding over 8%. SK Hynix Inc. saw a dramatic 13% plunge in Seoul, following a 13.1% surge in its US-listed American depositary receipts on Friday. Futures contracts for the Nasdaq 100 Index retreated 1.3%, and European shares were set to drop about 1% at the open. Micron Technology also tumbled 6.1%, amid rising concerns about stretched valuations and the sustainability of the AI-fueled rally.
The dollar, acting as a safe haven, strengthened against its Group-of-10 peers, making non-yielding precious metals less appealing, with spot gold falling 1.4% to $4,061.84 an ounce. Government bond yields also rose, with the yield on the rate-sensitive two-year note climbing to its highest level since February 2025. The yield on 10-year Treasuries advanced three basis points to 4.59%, while Japan’s 10-year yield advanced eight basis points to 2.780%, reflecting increased inflation and interest rate hike worries.
Investors are closely monitoring the upcoming US inflation data and Fed Chair Kevin Warsh’s congressional testimony for further clues on the monetary policy outlook. While some analysts, like Julia Wang from Nomura International Wealth Management, expect July to be a choppy month for equities due to inflation and rate-hike concerns, they also anticipate a solid earnings season, driven by tech companies and a resilient economy.
The US military's strikes on Iran, aimed at weakening its ability to attack civilian vessels in the Strait of Hormuz, followed Iranian drone and missile attacks on US allies including Kuwait, Jordan, and Qatar. Conflicting reports emerged regarding the status of the Strait of Hormuz, with Iran stating it had closed the waterway, while US authorities claimed shipping continued. Westpac Banking Corp.'s Damien McColough noted that this re-escalation highlights the high uncertainty surrounding the resolution in the Strait and the future normal.
