World stock markets are poised to conclude August on a cautious note as fresh hostilities between the US and Iran have pushed oil prices higher, while government bond yields in Germany and Japan have reached new multi-year highs. Brent oil futures climbed above $90 a barrel after US forces struck Iranian launchers, leading to retaliatory actions by Iran. This geopolitical tension, coupled with Federal Reserve Chairman Kevin Warsh's hawkish speech on inflation, has amplified concerns about persistent inflation and the likelihood of additional interest rate increases from major central banks.
Following Warsh's speech at Jackson Hole, market participants have increased the probability of a September Fed rate hike to 57%, causing short-term Treasury yields to surge. The 2-year Treasury yields held at 4.34% after a nearly 12 basis point jump, while 30-year bond yields were more contained at 5.20%. Major financial institutions like JPMorgan still anticipate a rate hike in December, though they acknowledge September is now a possibility. Barclays, however, has adjusted its forecast to expect 25 basis point rate hikes in both September and December.
Asian markets reacted with declines, with Japan's Nikkei slipping 0.1% and South Korean stocks falling 0.1%. MSCI's world stock index was marginally lower. In Europe, the STOXX 600 index edged down at the open, with trading volumes reduced due to a UK public holiday. US stock futures were flat to slightly weaker. Gold prices also fell by 0.3% to $4,437 an ounce, having shed 3.2% previously as bond yields spiked.
Investors are now closely watching upcoming economic data, including Friday's US August payrolls report and consumer price data due on September 11. Economists project payrolls to increase by 58,000, recovering from July's unexpected decline of 23,000, with unemployment holding at 4.1%. A significantly weaker jobs report would likely be needed to substantially reduce expectations of a September rate hike.
