Asian stock markets experienced a downturn on Monday due to two primary factors: hawkish remarks from Federal Reserve official Kevin Warsh suggesting a potential US interest rate hike, and a significant spike in oil prices following renewed conflict between the US and Iran. Warsh's speech at the Jackson Hole symposium indicated that with inflation at 3.7% and nearly double the Fed's 2% target, the central bank "had work to do" to control it. His refusal to provide explicit guidance increased uncertainty, leading investors to raise their bets on a September rate increase to 57%, which in turn pushed short-term US Treasury yields higher and strengthened the dollar.
The geopolitical tension between the US and Iran escalated after the US attacked Iranian rocket launchers on a small island in the Strait of Hormuz, prompting Iranian retaliation against US military targets in Jordan. This conflict, marking the first US strikes on Iran in a month, reignited concerns about crude oil supplies passing through the strategically vital Strait of Hormuz, which handles a fifth of global crude and gas. Both main crude contracts, West Texas Intermediate and Brent North Sea Crude, rose more than 2%, with Brent futures climbing 2.7% to $90.51 a barrel and US crude rising 2.6% to $85.57 a barrel.
The combined effect of higher US bond yields and geopolitical stress weighed heavily on Asian equities. Technology firms, heavily reliant on borrowing for AI investments, led the declines. Tokyo's Nikkei 225 fell 1.6% to 65,361.60, Hong Kong's Hang Seng Index dropped 0.8% to 25,383.90, and Shanghai's Composite was down 0.4% at 3,937.76. South Korean stocks also fell 0.1%. Gold, which typically benefits from lower interest rates, fell 0.6% to $4,425 an ounce. Analysts like JPMorgan's Michael Feroli and Barclays anticipate potential Fed rate hikes in both September and December, with upcoming US jobs data and the Consumer Price Index report being crucial for market sentiment.
